Private Equity 2021 Comparisons

Last Updated September 14, 2021

Contributed By Glimstedt

Law and Practice

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Glimstedt was established 1997. The corporate team works on large and medium ticket deals, using international legal standards and proactive, smooth and non-aggressive deal making. Glimstedt is known as a market leader in the field of private equity and venture capital, working on both fund formation and subsequent investments. It is a member of the Lithuanian Venture Capital and Private Equity Association and actively participated in the amendment of the legal framework for regulating private equity funds. The corporate team has recently advised Mastercard, Walgreens Boots Alliance, General Electric, Tele2 and many other international names. The firm has also advised local and regional private equity and venture capital players, such as EIF, EBRD, Centerbridge, Next Road Ventures, Litcapital, Iron Wolf Capital and others. Glimstedt covers all three Baltic countries, with offices in Estonia, Latvia, and Lithuania.

Until a few years ago, the Lithuanian private equity landscape was somewhat spotty. There were a few local private equity funds with committed capital in the range of EUR20–40 million, enabling them to make only relatively small-ticket deals. On the other end of the spectrum, global and regional players used to appear on the market for the largest transactions only – chasing banks, mobile operators or infrastructure deals. Mid-market deals that were too small for global funds and too large for locals lacked any proper private equity interest, and local mid-market deals only appeared as part of funds’ buy-and-build strategies through their portfolio companies. Only a few institutional players had devoted early venture capital.

The situation has changed rather quickly, with the Baltic funds growing in size and number. Over the last couple of years, several growth, buyout and even venture capital funds have reached EUR100 million closings, with some such deals approaching the EUR200 million mark. Local buyout funds are filling the gap in mid-market private equity transactions with a natural strategy to buy and build national or Baltic champions, so that they become interesting to international strategic and financial investors. On the venture capital scene, local players manage multiple accelerators and seed funds, as well as later-stage venture capital funds that are capable of implementing a decent Series A financing. International players are still prominent in large buyout and infrastructure transactions, but they are starting to face local competition in upper mid-market deals.

The private equity market remained very active in 2021, while the general M&A market reached an all-time high.

The Lithuanian market (and that in the Baltics overall) has been no different from the rest of the world in recent years due to the COVID-19 pandemic. Healthcare and information technology deals have attracted huge interest, but no particular sector stands out when looking into closed deal reports. While the consolidation of private clinics continued, similar activity was seen in the agriculture and food, entertainment and (financial) technology sectors.

The Lithuanian legal system is rather stable in terms of investment protection, and no major shifts have occurred. However, certain important changes in merger control, strategic investment controls and tax are worth mentioning.

In merger control, the jurisdictional thresholds for Lithuanian merger clearance have been increased. However, the most important aspect is not the numbers but rather the updated rule that only Lithuanian revenue is included for threshold calculation purposes. Lithuanian businesses are mostly focused on exports and it used to be the case that Lithuanian merger clearance was required even if the Lithuanian market was not affected by the merger. The rule has now been changed, allowing for the avoidance of formalities from time to time.

Recent competition law amendments have introduced a stop-the-clock rule, which allows the competition authority to pause the four-month term for issuing clearance if additional requested information is not submitted in a timely manner by the applicant. This makes it much more difficult to estimate when the clearance could be received if there is a larger horizontal overlap between the acquiring and target companies.

So-called strategic permits are required from the Lithuanian government for investments in a constantly expanding list of companies and sectors (see 3.1 Primary Regulators and Regulatory Issues). These rules for the protection of national security interests have recently been fine-tuned again. Notably, decisions now come quickly (in a month at most) and are rarely negative. Failures to receive such permits have been discussed widely but litigation is not likely to bring positive results because of the confidentiality of state security information, which is the basis for negative decisions.

From a tax perspective, the national authority is becoming more and more sceptical about empty structures without real economic activities. Investors need to be careful when building unreasonably large investment structures as they may draw the attention of the tax authority.

Merger Control

If the European Commission does not have jurisdiction over a merger, it may be subject to review by the national Competition Council.

A transaction has to be notified to the Competition Council if all parties involved have a turnover of at least EUR20 million and at least two of them have more than EUR2 million turnover each. Only local turnovers are calculated; exports are excluded. In practical terms, this means that a transaction would normally be caught by the merger control regime if the target generates local income (at least EUR2 million) and the buyer’s portfolio generates some substantial income from Lithuania so that in total there is EUR20 million of local turnover.

Formally, merger clearances are issued within one month if the “first phase” is sufficient, or within four months if a more detailed “second phase” review is conducted by the authority.

Practically, however, the preparation of a submission and co-ordination with the authority prior to starting counting the terms may take several months, so the actual terms of merger clearance may extend to considerably longer periods.

Financial Supervision

Lithuanian companies may be listed on the joint Baltic (Estonian, Latvian, Lithuanian) equities list managed by Nasdaq, which also operates the depository of public company shares and the relevant resources for regulated information.

If a takeover of a listed company is considered, mandatory public offers and squeeze-out procedures would be co-ordinated with the Lithuanian central bank (Bank of Lithuania), which also performs financial and insurance supervision functions.

National Security Interests

In many sectors (eg, finance and information technology), acquisitions require notification to the Commission formed under the Law on the Protection of Objects of Importance to Ensuring National Security. Within 15–20 business days of the notification being filed (including identification of the investor’s controlling ultimate beneficial owners), the Commission may issue a clearance that no further investigation is necessary. If a detailed investigation is started, the term for final determination would mostly depend on the applicant’s co-operation and expediency in supplying additional information.

Full-scope descriptive legal due diligence exercises have long been forgotten in the Lithuanian legal market. This trend coincided with worldwide fashions but is due more to the increased confidence in the Lithuanian legal system since Lithuania joined the EU in 2004. Exceptions are rare and detailed descriptive reports may only be necessary in certain specific areas that are critical to the target’s business viability.

Nowadays, legal due diligence is still a matter of reviewing (or at least skimming through) the entire documentation provided by the seller or the target. The scrupulousness of the data rooms largely depends on the sellers. Whatever is provided, the buyer cannot allow itself to overlook any information that may appear to be an exception to the warranties, as general exceptions to warranties by disclosed information are normally agreed in the transaction documentation. Specific disclosure letters are employed in the largest transactions only.

Legal due diligence reports are tending to decrease in size, focus on red flags only and become more and more visual. These diminishing features are also attributable to the time allowed for due diligence teams to prepare reports.

In general, the focus of the due diligence largely depends on the sector of the target. Highly regulated activities such as finance or energy require detailed analysis from a legal perspective. While lawyers can rarely confirm the sustainability of revenue, except on paper by reviewing the formal termination clauses, legal due diligence reports can reveal a lot about human resources management and intellectual property protections, not to mention the credibility of capitalisation tables or the strength of lease contracts if they are of critical importance – eg, in retail trade or other B2C businesses. In early venture capital transactions, institutional investors are normally interested in capitalisation tables, IP, non-competes and other major business restrictions.

Another important feature of due diligence is the deferred disclosure of certain business-critical information, be it drug procurement prices in pharmaceutical retail or lease prolongation clauses in a car parking business. Such "red-file" procedures are normally resorted to when the buyer is an actual competitor or is soon to join the market from across the border. In these cases, depending on the sensitivity of the information, the disclosure may be deferred to:

  • the final stages of pre-signing when the financing of the transaction and willingness to buy is confirmed;
  • after the signing stage;
  • the pre-closing period when all other conditions precedent are fulfilled; or
  • the post-closing period (ie, never before the sale actually takes place but when post-closing termination clauses may be discussed).

Only the most fine-tuned transaction processes involve vendor due diligence. The additional timeframe and costs for such exercises are justified when the target is looking for international fund investors while the ticket size is still too small to generate global interest. In such cases, not only a general information memorandum but also a vendor due diligence report may serve as a handy catching point for a busy fund investment director screening potential opportunities.

Reliance on a vendor due diligence exercise by a buyer is an even more distant rarity; non-reliance or hold-harmless letters are more common in these situations.

Businesses in Lithuania are usually structured as limited liability companies – either public (listed or capable of listing, AB for short) or private (closely held, UAB for short). Both types of companies issue shares that represent financial interest and the ability to appoint the management, so companies are normally acquired by share sale and purchase agreements (SPA), which largely follow the international standards including signing-closing dichotomy, conditions precedent, warranties, etc.

Taking listed companies private is not a frequent event in Lithuania, due to the simple fact that there are not that many listed companies. In such cases, private negotiations with controlling shareholders are held because there are very few companies (if any at all) with a sufficiently dispersed ownership to start the acquisition process with a public tender offer. Going private, however, ultimately involves providing a tender bid to minority shareholders, which is mandatory starting from control acquisitions of as low as 33.34%. After such a tender offer, and provided a 95% stake is successfully built, the bidder may continue to squeeze out the remaining minority shareholders and acquire 100% of the company’s stake.

Acquisitions from a bankrupt estate normally involve court approvals for the pre-arranged deal or public auctions.

Well-organised auction sales (ie, sales that are structured but allow the seller to select any bidder in the end) normally achieve slightly better terms of sale. However, the principal structure of the SPA remains, and the seller may achieve a more beneficial allocation of risk in terms of warranties and indemnities, and faster closing from time to time, but not a completely different transaction structure that is alien to local and international standards. This is because the bidders are normally allowed to prepare their markups and negotiate final terms at the end of the structured sale process, even if the first draft SPA is introduced by the seller at the start of the process.

Far fewer negotiations are available or relevant in privatisation deals where the seller is a governmental institution providing few to no warranties and indemnities. In such cases, the bidder may rely on its own due diligence at most.

In smaller transactions, local private equity and venture capital funds in particular become shareholders directly in the companies acquired. Where the acquisition involves a foreign private equity fund or a more complex financing structure, bidcos and holdcos frequently pop up.

Achieving a clean exit is a headache for private equity fund managers, who need to ensure that funds can be distributed and liquidated without warranty claims on the way. The risk remains whatever structure is used, however, even if warranty and indemnity insurance is used. Private equity funds unavoidably become involved in the sale process and the sale documentation.

Deals are commonly financed with a combination of equity and debt. For a private equity fund with a buy and build strategy, the debt may already be available at the portfolio company level, but the primary transactions normally involve playing around with the financial assistance prohibition rules to push down the debt to the target level. Lithuanian statutory law strictly follows EU directives, and financial assistance has limited application if the rules are interpreted strictly. Creativity may also be punishable because recent Supreme Court practice has been unforgiving to the collaterals obtained by a bank from a target company that later went bankrupt.

Formal equity commitment letters are not normally required, besides the usual bidding letters. This may be due to the fact that the variety of local funds is still within a manageable range, and "everyone knows everyone" on the M&A market. International and regional players are not normally double-checked for their commitment level.

Both majority and minority acquisitions by private equity players occur in Lithuania. Global and regional funds are normally interested in majority acquisitions, and deal sizes in Lithuania can easily be digested by such funds. Local private equity funds mostly depend on their mandate. Buyout funds will, by default, look for majority control, while growth funds may be satisfied with controlling a minority. Venture capital funds can start with a 10% stake but with a long list of "reserved matters" requiring investor approval. In co-investment transactions, reserved matters may be delegated to a lead investor only.

A consortium of private equity bidders is a rare beast; again, ticket sizes in Lithuania are more than manageable for one fund. Secondly, such consortiums of joint control are likely to create merger control issues in ongoing or future transactions.

On the other hand, the venture capital world is full of transaction documents where the list of investors does not fit on one page. Here, merger control issues are not relevant and the tickets, however small they are, are generously shared among institutional investors, business angels and governmental subsidies.

Private equity fund documents may explicitly discuss co-investment opportunities for the respective fund investors, in the form of side letters for larger investors or even straight in the LPAs. This is increasingly common, particularly where local family offices are looking to allocate funds to targets carefully selected by other fund managers but still not paying management fees and carried interest. However, although they have rather deep pockets, Baltic pension funds have never directly co-invested with their investee private equity funds. On the other hand, direct exposure to real estate portfolios has been attempted by insurance companies, so appetite for private equity co-investments may appear in the near future.

Outside co-investors seem to be even more often than "in-house" resourced co-investments by fund investors.

Completion accounts have been a hugely prevalent form of price finalisation in the Lithuanian M&A market. Private equity funds in the bidding role preferred locked-box or even fixed-price mechanisms to make it easier to control draw- down amounts and fund cash flows. Corporates have been more flexible and willing to set the price strictly matching the completion accounts.

In the completion accounts mechanism, it is not unusual to retain a certain portion of the price or to escrow it if the potential adjustment may end up being large amounts.

Locked-box mechanisms have regained their popularity in recent years, evidencing a seller-friendly market. Naturally, the COVID-19 pandemic provided a good argument for sellers to insist on locked-box or fixed-price mechanisms if the business is sustainable and may suffer interim difficulties during lockdown only.

Private equity sellers tend to be hawkish in negotiating sale terms and try to limit the leakage protections offered to buyers. In the end, however, there are no substantial differences if the seller is a corporate.

If locked-box consideration structures are used, protections against leakage are included. However, in times of cheap money and banks charging negative interest on deposits, interest on leakage is not insisted upon.

Completion accounts mechanisms very often entail a pre-court dispute resolution, normally involving the appointment of an unconflicted international auditor, whose opinion is made explicitly without prejudice to further arbitration or litigation.

Pre-trial auditors are much less common in SPAs with locked-box mechanisms, in which any dispute is discussed among the parties and litigated thereafter.

Local trends show no mercy for failure to obtain financing or shareholder approvals. In other words, such conditions precedent are very rarely accepted by sellers unless the price offered is extremely good, the asset is otherwise attractive to many bidders and the financing is easy to obtain for such target. Shareholder approval conditions precedent may be found in some hostile situations, but this is very rare in the Lithuanian M&A market.

Third-party change of control consents (banks, landlords, major suppliers, critical clients, important IT providers, etc) are much more commonly found in the list of conditions precedent. Of course, in cases of utmost confidentiality, the parties normally weigh the willingness to keep the transaction private before closing against the risk that a particular counterparty or financier may terminate due to change of control.

Material adverse change/effect clauses are rather frequent, but their definitions vary considerably. In some cases, only general market disruption would amount to a material adverse change; in other cases, quite the opposite, because general market movement is excluded from the estimation of the adverse effect. Lastly, various specific circumstances (eg, the termination of major supply contracts) may be part of the definition of a material adverse change.

“Hell or high water” undertakings require the buyer to do more than just any commercially reasonable buyer would do if regulatory clearance conditions are not easy to implement. This occurs particularly often due to competition authorities’ demands. In such cases, the buyer is pushed to divest horizontally or vertically overlapping business. In Lithuania, it is often the case when the merger applicant must sell an even larger business than is overlapping in order for such divested portion to constitute a sustainable business and remain a viable competitor.

Hell or high water terms are unusual in Lithuania, partly due to the fact that structural divestment commitments are impossible to implement on reasonable terms. Also, sometimes it is just not worth getting into long-lasting dealings with competition authorities in order to push the consolidation to its limits when less concentrated markets are still available to pursue.

When the parties sign an SPA, failure to close without good reason (eg, the other party’s fault or lack of regulatory clearance) is normally deterred by a penalty. Such "exit tickets" are normally priced in the range of 5–15% of the deal value. Penalties are not prohibited under Lithuanian law but they should not be “clearly too large”, as the language of the Civil Code provides. Thus, any excessively high penalties are likely to be challenged in court, often successfully. When parties choose arbitration, they expect a more welcoming approach towards penalties by experienced M&A arbitrators.

Normally, the amounts of penalties are equal for each party. Thus, even if a private equity buyer would have a more aggressive negotiating position towards financial expenses, it would commonly accept a larger break fee in order for the same fee to deter the seller making an opportunistic refusal to close the deal.

Termination rights can be split into two categories, depending on the timing of such rights – ie, before closing and afterwards.

Pre-closing

Termination rights before closing are normally apparent from the conditions precedent, where failure to achieve any such condition enables the beneficiary of such not to close and to terminate the deal. Normally, the buyer and the seller have separate lists of conditions precedent, with the buyer’s beneficiary list being much more elaborate, including:

  • the validity of warranties in all material respects;
  • that there are no material adverse changes (however they are defined);
  • that regulatory clearances are obtained; and
  • that third-party consents are obtained.

As mentioned, financing conditions precedent are not common in Lithuania.

The seller’s list is considerably smaller, often including only regulatory clearances.

Post-closing

Termination after closing is available in Lithuania based on statutory contract law – eg, due to material breach. Thus, it is not uncommon to try to limit the scope of such termination rights after closing, or even to explicitly withdraw those rights. The enforceability of a waiver of such termination rights is highly disputable, however – the parties at least express their clear understanding that, after closing, the control of the business changed hands and restitution is not reasonable from business management nor from a financial perspective. One cannot say that private equity buyers or sellers have different views from corporates that are of a similar financial sophistication level.

Private equity sellers are very careful of committing to any undefined liabilities as this might affect fund performance long after the deal is made. Therefore, they tend to limit warranties and indemnities to title, although business, tax and similar aspects sometimes cannot be avoided. On the buy side, private equity funds obtain the usual set of warranties and indemnities (see 6.9 Warranty Protection).

Private equity sellers aim for clean exits to limit exposure against accumulating carried interest. A full catalogue of warranties and liability clauses intervene with these plans, and commonly merit significant attention in private equity exits.

Catalogue and Warrantors

Private equity sellers usually require business warranties to be provided by the management, particularly if the management had been granted generous options within their compensation packages. Private equity funds then provide share title warranties and cannot normally get away from confirming the completeness of financial accounts and the payment of taxes. The specific wording would be carefully revised. The attractiveness of the asset usually dictates whether or not any additional warranties, such as environmental, are provided by the private equity seller.

Nothing much changes if there are two funds on both sides of the table, and the buy side is also a private equity fund.

The most important feature is whether data room documents constitute an exception to the warranties, in which case the catalogue will normally reach its full extent. In Lithuania, it is becoming customary to allow such general exception without drafting a separate disclosure letter. The buyer would then rely on its due diligence teams and check carefully that the disclosure language in the SPA demands reasonable visibility of the exception within the data room.

The seller would consider which pieces of information deserve specific mention, even if they are contained somewhere deep in the disclosed contracts or regulatory information. The amounts of indemnity are then agreed in the final negotiations if the disclosed risks are not acceptable to the buyer (see 6.10 Other Protections in Acquisition Documentation).

Quantitative Limitations

Warranties are normally limited in time. Business and most other warranties usually bear a limitation of 12–36 months.

Tax entails a longer period because, in Lithuania, the standard statute of limitations in tax is three years; however, it may easily stretch to five or even ten years. Parties then discuss whether the standard limitation of three taxable years (plus the year when the transaction closes) is sufficient. The buyer would normally look for coverage over the full period when the tax authorities can still bite (which may be ten years in the case of grave tax misdemeanours).

Share title warranties may be unlimited in time or last for ten years, derived from the Lithuanian Civil Code, which sets forth this statute of limitations for contractual claims.

Parties also normally agree on monetary limitations to the warranties. The claims are normally capped in the range of 10–25% of the purchase price (or equity value if there is a large amount of debt taken over). The cap may be larger for smaller transactions. Title warranties are normally capped at 100% of the purchase price.

The minimum amount of issue to be included in a litigation package (de minimis threshold) ranges from 0.1–0.5% of the purchase price, or is some relatively small amount in absolute numbers. The basket of claims needs to reach 0.5-2% in order to be discussed at all. Once the appropriate basket is collected, the claim may then be raised from the first euro; no deductibles are normally agreed.

Standard of Knowledge

Many warranties may be limited by knowledge qualification – ie, the seller is liable for something it knew. The knowledge normally extends to constructive knowledge of “should have knowns” and may include such imputed knowledge of the main management figures.

Because the warranties are normally limited by disclosure, specific indemnities would be discussed in the context of identified risks. Much less often, indemnities not affected by disclosure are agreed regarding future tax claims or similar specific areas (eg, GDPR or IP rights) where no particular risks are identified prior to the transaction.

In the seller market, retentions and escrows are appearing less and less often to secure the payment of warranty claims. However, if the seller is a private equity fund, it would not be unusual to negotiate a retention because it is more difficult to collect debts from such funds due to their commitment structures.

Warranty and indemnity (W&I) insurance is growing in popularity but is still far from being an obvious choice, even for private equity sellers. While W&I insurance premiums have become considerably cheaper, the policy exemptions undermine their wider use because those specific exemptions (eg, GDPR) are things that the seller wants to be insured against.

In Lithuania, M&A transactions are not often litigated. Parties usually exhaust all negotiation opportunities and, in the case of price calculation in terms of completion accounts or earn-outs, go through the agreed pre-trial procedure of appointing an independent auditor.

Warranty claims may naturally be required to be referred to litigation when the parties do not agree on the amount of liability. In venture capital or growth strategies, it is not uncommon to have disputes over the contents of the shareholders' agreements (option or drag rights, and veto rights over budgets or management appointments), which may end up in litigation.

Publicly, M&A litigation is even less apparent, because M&A transactions are normally subject to arbitration, which is completely confidential.

The Baltic Nasdaq exchange contains around 50 companies, with a further dozen on the less-regulated multilateral trading facility. Of these, just over 25 are registered in Lithuania. Therefore, there are few potential public targets and public-to-private transactions are very uncommon.

Upon exceeding a 1/3 stake, the acquirer has to place a mandatory offer to buy the remaining shares. Following such offer, if the bidder acquires 95%, it can then proceed with a squeeze-out procedure for the remaining minority shareholders, who have a corresponding put option.

The mandatory offer threshold is 1/3 of voting shares – see 7.2 Material Shareholding Thresholds.

Cash is used for consideration in an absolute majority of cases.

However, Baltic start-up stars and (soon-to-be) unicorns are turning to mergers and/or consideration in the form of shares of acquiring entity. These are still relatively rare cases though.

Public-to-private takeovers are so rare in Lithuania that no real trustworthy conclusions can yet be drawn. Naturally, global and regional private equity funds would bring their standards to the Baltics and would then deal with the regulators, who are generally receptive to international practices.

Squeeze-out mechanisms are available following a mandatory bid and the building of at least a 95% stake.

If the stake does not reach 67%, the buyer would be limited in adopting the most important decisions (share capital increases and reductions, profit distribution, etc) but 50%+1 share allows a buyer to control management appointments. Naturally, these thresholds may be smaller in practice if the minority shareholders are not actively attending general meetings. The controlling shareholder might aim to offer certain appointment rights to larger stakeholders in exchange for joint voting arrangements.

Various internationally known commitments would be considered by a private equity bidder, though it is difficult to summarise Lithuanian customary practice as it is simply too rare.

Hostile takeovers are generally not prohibited and takeover protections are not supported by statutory law, following the EU Takeovers Directive, which is implemented in national law.

However, all of the Lithuanian listed companies have controlling shareholders and no hostile takeover is possible under normal circumstances.

In the words of Warren Buffett, the principal job of the private equity manager is to “hire good people so that they hire good people”. Therefore, generous compensation schemes are offered to CEOs and other senior management.

If the CEO is newly appointed, her/his compensation may include options in the range of 10–15%. For incumbent CEOs who were already present in building the company before its acquisition by the private equity fund, the sweet equity may increase to 20%. Of course, the amounts get considerably smaller when the companies acquired are larger.

Although they are persistently chased and widely headhunted, managers rarely negotiate direct shareholdings, especially when the major shareholder is a private equity fund. The latter simply do not like to get involved in minority voting in shareholders' meetings, etc, so management teams are normally offered options that can be exercised upon exit.

At the time of writing, preferred shares have not been widely used in Lithuania, due to certain cumbersome restrictions. Ordinary shares are used, with additional rights and restrictions set forth in the shareholders' agreements.

Management options normally vest over a period of three to four years, with slightly larger weight placed on the first year. Employment (personal income and social insurance) tax relief is available if the employee stock options are exercisable no earlier than after three years – ie, personal income tax payment is deferred to the moment when the income is actually earned through the realisation of acquired shares.

Customary good and bad leaver provisions are agreed although, from a legal perspective, those provisions can hardly be specific enough in contentious cases. A bad leaver is somebody who leaves without good reason or is dismissed due to her or his fault, which may include negligence in management. Of course, bad leaver provisions are normally invoked when there is a clear self-dealing case or similar fraud.

Sometimes, separate "neutral leaver" provisions are necessary for cases related to death or major health conditions.

Senior management is normally restricted through conditions such as non-compete, non-solicitation and non-disparagement after the termination of the relationship with the target company.

A particular feature of Lithuanian law is that a CEO must have an employment agreement; other senior management (CFO, CMO, etc) are also normally employed. This brings certain peculiarities in terms of non-compete agreements, because Lithuanian labour law requires at least 40% of the previous salary to be paid to a former employee to compensate for compliance with a non-compete covenant. Thus, the shareholders think twice about whether the non-competition of a former manager is worth the money and are sometimes satisfies with relying on the general statutory restriction on using the confidential information of a previous employer.

It is sometimes argued that, if the company manager is also a shareholder, her/his non-competition may be derived from the shareholders' agreement and thus be outside the scope of the employment relationship (and free from compensation). The case law is not yet clear but is unlikely to be supportive because the courts usually decide in favour of employees.

In exchange for subscribing the relevant shareholders' agreements that are mostly beneficial to the major stakeholders, minority shareholdersreceive certain protections.

Anti-dilution protection is normally crafted so that the minority shareholders would not be diluted if they manage to co-invest together with the controlling shareholders. Otherwise, anti-dilution would be of no use.

Minority shareholders also usually receive a tag-along right, which in any case is mirrored by the drag-along right of the controlling shareholder.

Veto rights are normally not granted to management minority shareholders.

Before describing shareholder controls, it is worth considering the Lithuanian corporate governance structure. In Lithuania, three governing bodies may be formed: the supervisory council, the board and the CEO. Of these, the CEO may also be a board member.

Notably, the CEO plays an exclusive role because she/he is the "management board" in the way it is understood in certain other countries. The CEO has unilateral signature rights, so it is often difficult for foreign private equity managers to understand that board appointments are something of an intermediary step towards gaining full control over the company. Of course, it is the board which appoints and removes the CEO.

The board may be either executive or non-executive (or a combination thereof), depending on the shareholders’ appointments.

Supervisory councils are rarely formed in Lithuanian companies as they play a nominal role. If foreseen under the company's Articles of Association, the supervisory board appoints the board members.

Therefore, private equity fund managers normally make sure that at least one or two board members are delegated from in-house, while other board members may be appointed by minority shareholders or, as mentioned, the CEO would take the third seat, which is the minimum amount of board members. The CFO is often the board member as well.

In any case, the controlling shareholder’s votes are normally critical in the board, either by documents or practically.

Information rights are normally part of transaction documentation and are usually co-ordinated with the private equity fund’s LPA and investor reporting guidelines.

Shareholders in Lithuanian companies enjoy the shield of limited liability, which is very rarely broken. As a general rule, under the Lithuanian Civil Code, the shareholder becomes liable for the obligations of the company if the latter cannot perform due to an unfair action of the shareholder. This rule is not widely used but potentially deters shareholders from asset tunnelling and similar unfair practices, particularly when the company faces insolvency.

Environmental, social and governance issues (ESG) is a hot topic all around the world. Private equity fund managers considering subsequent fundraising prospects unavoidably have to impose ESG requirements on their portfolio companies.

The transparency and reporting requirements of private equity investors sometimes raise the companies to new levels of compliance.

Private equity funds normally tend to sell their investments within three to seven years. Longer periods are an exception, which the fund managers are generally not proud about. Shorter periods also happen occasionally.

Exits are normally organised as a structured bidding procedure. IPO exits are still rare in Lithuania, although a couple have been successfully implemented recently. Dual-track procedures and re-investments upon exit are even less frequent.

Some fund managers say that drag rights are the most important in private equity and venture capital contracts. They are normally negotiated in all cases when there is not 100% control, and are usually enjoyed by a 50%+1 investor majority or a single lead investor.

The tag rights of co-investors, corresponding to the drag-along rights, are also normally discussed. However, management rarely gets an unlimited tag-along because management teams are a common part of the offering to the subsequent private equity buyer.

IPOs are rare in Lithuania, but lock-ups of up to 12 months have been seen once such exit method is selected by the private equity seller. “Relationship agreements” between the private equity seller and the target company are also entered into, to define certain board appointment, information exchange and other rights.

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Law and Practice in Lithuania

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Glimstedt was established 1997. The corporate team works on large and medium ticket deals, using international legal standards and proactive, smooth and non-aggressive deal making. Glimstedt is known as a market leader in the field of private equity and venture capital, working on both fund formation and subsequent investments. It is a member of the Lithuanian Venture Capital and Private Equity Association and actively participated in the amendment of the legal framework for regulating private equity funds. The corporate team has recently advised Mastercard, Walgreens Boots Alliance, General Electric, Tele2 and many other international names. The firm has also advised local and regional private equity and venture capital players, such as EIF, EBRD, Centerbridge, Next Road Ventures, Litcapital, Iron Wolf Capital and others. Glimstedt covers all three Baltic countries, with offices in Estonia, Latvia, and Lithuania.