JUDGMENT

ON BEHALF OF THE REPUBLIC OF LATVIA

Riga, 4 February 2009

in the Case No. 2008-12-01

The Constitutional Court of the Republic of Latvia, composed of the Chairman of the Court session Gunārs Kūtris, Justices Kaspars Balodis, Aija Branta, Juris Jelāgins, Kristīne Krūma and Viktors Skudra,

having regard to the constitutional claim of a limited liability company “Itera Latvija”,

based on Article 85 of the Satversme (Constitution) of the Republic of Latvia and Article 16 (1), the first part of Article 17 (11), Article 19.1 and Article 28.¹ of the Constitutional Court Law,

on 6 January 2009 in the Court session examined the case in written proceedings:

“On Compliance of the Second Part of Section 142 and the Second Part of Section 284 of the Commercial Law with Article 1 and Article 105 of the Satversme (Constitution) of the Republic of Latvia”.

The Constitutional Court has established:

1. The Saeima (Parliament) of the Republic of Latvia (hereinafter - the Saeima), on 13 April 2000 adopted the Commercial Law, which came into force on 1 January 2002.

Section 142 of the Law “Documents of Incorporation of a Company” provides:

1. The memorandum of association of the articles of association is the documents of incorporation of a company.
2. The conditions of the documents of incorporation may vary from the provisions of the law only when the law explicitly permits such variance.”

At the same time the first and the second part of Section 284 of the Law “Taking of Decisions by a Meeting of Stockholders” provided:

“(1) A meeting of stockholders shall take decision by a majority of votes of the stockholders with voting rights present if the law does not specify a larger number of votes.

(2) Decisions regarding the making of amendments to the articles of association, the issuance of convertible debentures, the reorganization of the company and the transmission or continuation of the operations shall be taken by a meeting of stockholders if not less than three quarters of the stockholders with voting rights vote for them.”

On 22 April 2004, the Saeima adopted the law “Amendments to the Commercial Law”, and these amendments offered the following working of the second part of Section 284 of the Commercial Law: “Decisions regarding the making of amendments to the articles of association, the issuance of convertible debentures, the reorganization of the company, conclusion, amending or termination of groups agreements, incorporation of the company, giving consent to incorporation of the company and cessation of activities, and the transmission or continuation of the operations shall be taken by a meeting of stockholders if not less than three quarters of the stockholders with voting rights vote for them.” Such wording of the second part of Section 142 and second part of section 284 were valid at the date when the constitutional claim was filed.

On the other hand, on 18 December 2008, the Saeima adopted the law “Amendments to the Commercial Law”, which provided that the second part of Section 284 of the Commercial law shall be supplemented by the following words: “if the articles of association do not provide for a larger number of votes”.

2. The applicant – the limited liability company “Itera Latvija” (hereinafter – the Applicant) asks to assess compliance of the contested norms with Article 1 and Article 105 of the Satversme of the Republic of Latvia (hereinafter – the Satversme).

Since February 1999, the Applicant is a stockholder of the stock company “Latvijas Gāze”. Initially it possessed the stocks that constituted 25 percent of fixed assets of the company. On 21 July 2003, the Applicant had sold a part of the stocks, and at present it possesses the stocks that constitute 16 percent of fixed assets.

On 1 April 2002, the Commercial Law came into force, according to which the principles of voting when taking important decisions were changed. The Law imperatively provided for the necessary number of votes for taking such decisions, namely, not less than three quarters of the votes of the stockholders with voting rights present. No other number of necessary votes has been included in the incorporation documents, including the articles of association.

The Applicant holds that because of the contested regulation, first of all, any influence on the process of decision making is lost and consequently the possibility to protect one’s interests.

The previous wording of the articles of association provided that the meeting has the rights to take decisions regarding several important questions only if at least three quarters of the votes of the stockholders with voting rights are represented, and decisions regarding these questions are regarded as adopted if 85 percent of stockholders present have voted for. Consequently, the Applicant was provided with the possibility to block adoption of important decisions at the rate of 15 percent plus one vote. It meant that the rest of the stockholders could not adopt important decisions without the consent of the Applicant. Neither could the stockholders change these rights without the consent of the Applicant, which, in fact, was one of the guarantees of the investments.

The Applicant indicates that it has obtained the stocks before adoption of the contested norms, and it has relied on the fact that the state would protect its rights to affect decision making process regarding issues that are substantial for the company. In the result of the activities of the legislator, these rights have been considerably violated, namely, the Applicant was deprived of any influence on the decision making process regarding important questions.

According to the Applicant, the legislator, when adopting the contested regulation, has considerably amended relations regulated by previous laws and thus has interfered with the private rights field. Interference with the rights and liabilities deliberately undertaken by the stockholders is unconformable with a law-governed state and does not comply with the principle of proportionality and legal security, namely, principles of a democratic state that follow from Article 1 of the Satversme.

By suggesting that restriction of property rights in certain cases can be justified by the general interest, the Applicant holds that in the case under review these rights have been restricted without any necessity or benefit of the society.

Secondly, the contested norms also violate the rights of the Applicant to property. The rights of a stockholder to affect the decision-making process regarding the issues that are substantial for a company are reflected in the value of stocks. The block of stocks that does not confer such rights has a lower value if compared to the block of stocks that entitles a person. The value of the stocks owned by the Applicant had reduced, and the reduction is considerable.

After having got acquainted with the case materials, the Applicant emphasized that the Saeima, in its reply, has not justified legitimacy of the restriction of rights and proportionality thereof with particular benefits reached in the result of the restriction of the basic rights of the Applicant. The contested norm, by prohibiting requiring a larger number of votes necessary for adoption of substantial decisions, restricts the basic rights of the Applicant. Articles of association provide for a larger number of votes, for example, 80 or more percent, would protect the interests of the minority better than it is permitted by law since, according to the law, 75 percent of votes is regarded as the number of votes necessary for taking decisions.

3. The institution that adopted the contested norms – the Saeima, indicates in its reply that it does not agree with the opinion of the Applicant and holds that the contested norms do comply with legal norms of higher legal force.

The Saeima draws attention to the fact that the objective of the second part of Section 284 of the Commercial Law is to protect the rights of stockholders (especially minority stockholders) because it provides that important decisions are adopted with the qualified majority of votes only. Protection of minority stockholders is based on three main principles: equality, transparency and availability of information. As to the State, it is provided with freedom of action, which follows from the Second Council Directive 77/91/EEC of 13 December 1976, the Third Council Directive 78/855/EEC of 9 October 1978 and the Sixth Council Directive 82/891/EEC of 17 December 1982. Such freedom of action follows also from Article 105 of the Satversme, which permits restriction of property law by means of a law.

Article 105 of the Satversme generally protects the possibility to use stocks. From this Article follows a duty of the State to establish provisions that would balance interests of different persons, which particularly concerns stock companies, decision-making of which requires imperative regulation in order to ensure existence and functioning of such company taking into consideration large number of stockholders and relatively fast change of them. The Saeima holds that the contested norms guarantee a reasonable balance between the different groups of stockholders.

The Saeima indicates that the legislator has the rights to introduce such amendments to the normative regulation that would change previous conditions by proving a reasonable term for transition to new requirements.

The Law “On Stock Companies” did not contain a norm analogous with the second part of Section 142 of the Commercial Law regarding the fact that the provisions of documents on foundation of a stock company may not differ from the provisions of law unless the contrary is provided by law. On the other hand, it was not forbidden to include such norms into the articles of association of a stock company that would provide for a larger minimum number of votes necessary to adopt substantial decisions if compared to what has been established by law.

The Commercial Law was adopted on 13 April 2000 and it came into force on 1 January 2002. A transitional period up to 31 December 2004 was provided for stock companies to be registered in Enterprise Register by thus allowing plan its functioning according to the Commercial Law. Consequently, the Law provided for a transitional period of several years for implementation of the requirements of the law.

The Law has not provided for any exceptions. Namely, it does not regulate that the contested norms do not apply to the stock companies already founded at the date of adoption of the Commercial Law because this Law launches an important commercial law reform. According to the Saeima, by providing for exceptions regarding this and other questions, the reform would be restricted.

The Saeima holds that the subjective reliance of the Applicant on invariability of law and articles of association is not legally protected. Recognition of the second part of Section 284 of the Commercial Law as invalid would considerably infringe the interests of minority stockholders because this would exclude the minimum requirement regarding the necessary qualified majority of votes when taking important decisions.

4. In the frameworks of the case under review, the Human Rights Protection Bureau of the Republic of Latvia and an associate professor of the Faculty of Law of the University of Latvia Dr. iur. Aivars Lošmanis were invited.

5. The Human Rights Protection Bureau states in its opinion that the second part of Section 284 of the Commercial Law restricts the rights of a person to property.

The Human Rights Protection Bureau indicates that, according to the case-law of the European Court of Human Rights (hereinafter – the ECHR) a stock company must create the content of the human rights regarding property rights for a natural or legal person. Only stockholders as owners of stocks have the rights to make the decisions mentioned in the first part of Section 284 of the Commercial Law. These kinds of decisions have a direct influence on the stocks of the company and thus imply the interest of property rights of a stockholder. Since the legislator has established an imperative procedure, according to which decisions that influence the extent of the property rights of the stockholders of the company are taken, as well as the stockholders can not establish such procedure arbitrarily, it can be admitted that the property rights have been restricted. Moreover, the fact whether in the result of introduction of the contested regulation the value of the stocks of the Applicant has been reduced does not play a decisive role.

6. An associate professor of the Faculty of Law of the University of Latvia Dr. iur. A. Lošmanis has indicated in his reply that the objective of the second part of Section 284 of the Commercial Law is to ensure greatest possible participation of the stockholders in the decision-making process when dealing with issues that are legally and economically substantial for the company. The question regarding the objective of the above-mentioned norm, however, must be regarded in the context of a question regarding lawfulness of a meeting of stockholders, i.e. with Article 275 of the Law.

The provision that was effective before 14 March 2002 provided that a meeting of stockholders shall have the right to take decisions irrespective the equity capital represented there, and it has been impossible to establish the limits of lawfulness of the meeting of stockholders. This provision that could not be amended by means of articles of association was expressed as an imperative provision of the second part of Section 275 of the Commercial Law. Both norms taken together have a common objective, namely, observing the character of a stock company as a public company not to permit that minority stockholders could block decision-making process.

Law “Amendments to the Commercial Law” of 14 February 2002 amended Section 275 of the Commercial Law by providing a possibility to establish any threshold of representation norm. The second part of Section 275, however, remained unchanged. There was a situation formed that one could arbitrarily determine the representation norm of a meeting of stockholders, however it was forbidden to introduce any amendments to the provisions regarding the majority of votes established in the articles of association. Consequently, the amendments to the Commercial Law that were introduced with a view to liberalize the internal legal regulation of a stock company were incomplete. The objective could be reached if the second part of Section 284 would be amended by means of Section 275 by providing a possibility to determine another (larger) number of the majority of votes when making important decisions.

7. The Applicant holds that the contested norms do not comply with Article 1 and Article 105 of the Satversme since they prohibit establishing, in the articles of association of the company, a larger necessary number of votes when taking important decisions if compared with what has been established by law.

7.1. On 18 December 2008, the Saeima adopted the law “Amendments to the Commercial Law”, which came into force on 21 January 2009. The above mentioned Law introduces amendments to the second part of Section 284 by supplementing it with the following words: “if the articles of association do not provide for a larger number of votes”. Consequently, beginning with this date it was not prohibited to establish in the articles of association of the company that the more than three quarters of the votes of the stockholders with voting rights present are necessary in order to take decisions regarding making of amendments to the articles of association, the issuance of convertible debentures, the reorganization of the company, conclusion, amending or termination of groups agreements, incorporation of the company, giving consent to incorporation of the company and cessation of activities, and the transmission or continuation of the operations. Consequently, the Saeima, by introducing amendments to the Commercial Law, has prevented the dispute of the case under review. Taking into consideration the aforesaid, the Constitutional Court must assess whether it is necessary to continue proceedings in the case.

7.2. Item 2 of the first part of Article 29 of the Constitutional Court Law provides: “Proceedings in the case may be closed before the judgment in the case is announced by a decision of the Constitutional Court, if the disputed legal norm (act) is no longer in effect.”

One of the contested norms, namely, the second part of Section 284 of the Commercial Law was amended by the Law “Amendments to the Commercial Law” of 14 February 2008. By these amendments, provisions regulating the issue, which was the subject of the constitutional claim, were changed. The second part of Section 142, however, has not been amended and is still valid in the wording that was effective at the date of filing the constitutional claim.

It is necessary to take into consideration the fact that the constitutional claim was submitted in order to contest the regulation that followed from the second part of Section 284 of the Commercial Law in relation to the second part of Section 142 of the Commercial Law. The Applicant was not satisfied that these norms prohibited to establish, in the articles of association of a company, larger number of the necessary votes for taking decisions provided for in the second part of Section 284 of the Commercial Law. By amending the second part of Section 284 of the Commercial Law, such regulation that permits providing, in the articles of association of a company, the necessary amount of votes has been created. Consequently, the contested regulation that followed from the second part of Section 284 of the Commercial Law in relation with the second part of Section 142 of the Commercial Law has in fact lost its force.

The Constitutional Court has already indicated that, when interpreting Item 2 of the first part of Article 29 of the Constitutional Court Law, it is necessary to take into consideration that the norm has been established in order to ensure economy of the Constitutional Court process and that the Constitutional Court would not render judgment in cases where a dispute no more exists (see: Judgment of 12 February 2008 of the Constitutional Court in the case No. 2007-15-01, Para 4). Consequently, Item 2 of the first part of Article 29 of the Constitutional Court Law must be applied in the cases when the institution that has passed the contested act by introducing amendments to normative acts, has itself prevented a dispute.

7.3. In order to take a decision regarding closing of proceedings in the case under review, the conclusion that Item 2 of the first part of Article 29 of the Constitutional Court Law can be applied in this case is not sufficient. The above mentioned Item provides that the Constitutional Court can terminate proceedings, but does not provide it as a duty of the Court, therefore the Court shall assess whether there exists considerations that provide for the necessity to continue proceedings (see: Judgment of 12 February 2008 of the Constitutional Court in the case No. 2007-15-01, Para 4).

If a case has been initiated based on a constitutional claim, then the fact that the applicant has asked to recognize the contested norms as invalid antedate can mean that it is necessary to continue proceedings in the case (see: Judgment of 5 November 2008 by the Constitutional Court in the case No. 2008-06-01, Para 8). Introducing of amendments to a normative act, in the result of which the contested norms become invalid, may be insufficient to prevent the negative consequences that can occur to a person due to the contested norms. A judgment of the Constitutional Court can be the only way how the person that has submitted a constitutional claim can ensure protection of his or her violated rights (see: Judgment of 12 February 2008 by the Constitutional Court in the case No. 2007-15-01, Para 4).

In the case under review, the Applicant has asked in its constitutional claim to recognize the contested norms as invalid as from the date of adopting of them. The Applicant maintained the claim also after having got acquainted with the case materials. Consequently, the Constitutional Court must assess whether the contested norms have without reason violated the rights of the Applicant guaranteed in the Satversme. Such is the case, it is also necessary to investigate whether the negative consequences caused in the result of application of this norm would be prevented at a sufficient level by means of the amendments of 18 December 2008 to the second part of Section 284 of the Commercial Law.

8. The rights of a person to property are enshrined in Article 105 of the Satversme, which provides: “Everyone has the right to own property. Property shall not be used contrary to the interest of the public. Property rights may be restricted only in accordance with law. Expropriation of property for public purposes shall be allowed only in exceptional cases on the basis of a specific law and in return for fair compensation.”

This Article on the one hand envisages the duty of the State to promote and support property rights, namely, to issue such laws, which would ensure the protection of these rights; however, on the other hand the State experiences the right to a certain extent and under a certain procedure to interfere in the use of property rights (see: Judgment of 16 December 2005 of the Constitutional Court in the case No. 2005-12-0103, Para 21).

The legal definition of ownership is provided in Section 927 of the Civil Law. It provides: “Ownership is the full rights of control over property, i.e., the right to possess and use it, obtain all possible benefit from it, dispose of it and, in accordance with prescribed procedures, claim its return from any third person by way of an ownership action.”

Consequently, ownership is defined in the Civil Law as subjective civil right, namely, the right of control over property (see: Rozenfelds J. Lietu tiesības. Rīga: Zvaigzne ABC, 2000, pp. 57- 58) and, as to its content, ownership is defined as enumeration of powers conferred to the owner.

“Full right of control over property” implies legal possibilities of the owner to manage the property, use it and obtain all possible benefit from it, as well as to transform it, use or destroy it. Moreover, the above mentioned control over property implies the authority of a person to carry out legal activities with the property by concluding legal transactions, for instance, transferring the property rights to other person by singing a forfeiture agreement (see: Grūtups A., Kalniņš E. Civillikuma komentāri. Trešā daļa. Lietu tiesības. Īpašums. Otrais papildinātais izdevums. Riga: Tiesu namu aģentūra, 2002, pp. 16- 17).

Such understanding of property rights complies with the legal regulation of civil law. At the same time, property rights are also the basic rights of a person that are protected by the Satversme.

When establishing the content of the basic rights provided for in the Satversme, it is necessary to take into consideration international liabilities of Latvia in the field of human rights. International norms of human rights and the practice of their application serve as means of interpretation on the level of constitutional law to determine the contents and scope of fundamental rights and the principle of the law-governed state, as far as it does not lead to decrease or limitation of fundamental rights included in the Satversme (see: Judgment of 13 May 2005 by the Constitutional Court in the case No. 2004-18-0106, Para 5 of the Concluding Part and Judgment of 18 October 2007 by the Constitutional Court in the case No. 2007-03-01, Para 11). The duty of the State to take into consideration the international liabilities in the field of human rights follow from Article 89 of the Satversme, which provides that the State shall recognize and protect fundamental human rights in accordance with this Constitutional, laws and international agreements binding upon Latvia. This article clearly indicates that the objective of the constitutional legislator was to ensure harmony of the norms of human rights with the norms of international human rights (see: Judgment of 30 August 2000 by the Constitutional Court in the case No. 2000-03-01, Para 5 of the Concluding Part, Judgment of 17 January 2002 by the Constitutional Court in the case No. 2001-08-01, Para 3 of the Concluding Part, Judgment of 18 October 2007 by the Constitutional Court in the case No.2007-03-01, Para 11 and Judgment of 16 December 2008 by the Constitutional Court in the case No.2008-09-0106).

The most important international documents do not provide for the definition of the content of the notion “property”. However, lack of such definition cannot be regarded as a surprising fact because the content of this notion varies from one legal system to another (see: Krause C. The Right to Property. Book: Economic, Social and Cultural Rights. A textbook. Second Revised Edition. Edited by Eide A., Krause C. and Rosas A. Dordrecht: Martinus Nijhoff Publishers, 2001, pp. 198 – 199). Consequently, the interpretation of this notion provided by the European institutions on human rights protection plays a great role in establishing the content of the notion of property. Both, the European Commission of Human Rights and the ECHR, based on the First Protocol of the Convention for the Protection of Human Rights and Fundamental Freedoms (hereinafter – the Convention), have concluded that the notion “property” implies both, movable and immovable property (see: Application No. 7456/76, Wiggins v. United Kingdom, decision of 8 February 1977, Decisions and Reports 13, p. 46). Moreover, this notion also implies non-material rights, such as agreement rights with an economic value (see: Case of Mellacher and Others, judgment of 19 December 1989, Series A, Para. 169), different economic interests (see: Case of Tre Traktorer AB, judgment of 7 July 1989, Series A, para. 159;  Iatridis v. Greece [GC], no. 31107/96, ECHR 1999-II).

Article 1 of the First Protocol of the Convention provides:

“Every natural and legal person is entitled to peaceful possession of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a state to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions of penalties.”

The ECHR has concluded that Article 1 of the First Protocol of the Convention includes three mutually related conditions. First of all, the basic sentence provides for the rights to peacefully enjoy ones possessions (see: Case of Lithgow and Others, judgment of 8 July 1986, Series A, no. 102, p. 50, Para 120). Secondly, the second sentence of the Article 1 prohibits arbitrary establishment of conditions for depriving of possessions (see: James and Others v. The United Kingdom, judgment of 25 March 1983, Series A, no. 98, Para 41). Thirdly, it is recognized in the second part of the Article that the State has the right to control the use of property in accordance with the general interest (see, e.g.: Sporrong and Lonnroth v. Sweden, judgement of 23 September 1982, Series A, no. 52, p. 24, Para 61; Iatridis v. Greece [GC], no. 31107/96, para. 55, ECHR 1999-II; Beyeler v. Italy [GC], No.33202/96, para. 100, ECHR 2000-I). These three separate conditions are mutually closely related. Article 1 of the First Protocol of the Convention provides for the responsibility of the State for interference with exercise of property rights in the case if in the result of such interference the economic value of property has been reduced (see: Theory and Practice of the European Convention on Human Rights. Third Edition by P. van Dijk, G.J.H. van Hoof. The Hague – London – Boston: Kluwer Law International, 1998, p. 620).

When interpreting the content of the property rights in relation with stocks, the ECHR has concluded that stocks are certificates that testify that the owner of the stocks possesses stocks of the company together with respective rights (especially the right to vote), and it has concluded that stocks have economic value (see: Application no. 8588/79 & 8589/79, Bramelid and Malmstrom v. Sweden, decision of 12 October 1982, p. 81; application no. 30417/96, Olczak v. Poland, decision of 7 November 2002, Para 60, pp. 8 - 9).

In the legal literature of Latvia of 20-s and 30-s of the previous century there dominated a viewpoint that stocks are quotative part of fixed assets that determine the amount of investments and thus legal status of a stockholder in the society, as well as the body of his or her rights and duties (see: Loebers A. Tirdzniecības tiesību pārskats. I daļa. Rīga: Valtera un Rapas akc. sab. izdevums. 1926, pp. 124). Assets confer both, personal and property rights. Personal rights are characterized as coexistence rights in the matters of a stock company, including the right to vote that were, among other rights, characterized as the most important (see: Čakste K. Tirdzniecības tiesības. I daļa. 1937./38. m. g. lasītās lekcijas. [B.V.], 1938, pp. 123).

Likewise, the first part of Section 226 of the effective Commercial Law provides that stocks and securities certify the stockholders’ participation in the equity capital of a company and gives them the right to take part in the administration of the company.

The Constitutional Court has already recognized that Article 105 of the Satversme, like Article 1 of the First Protocol of the Convention, envisages both – peaceful enjoyment of property rights and the rights of the State to restrict utilization of the property in the public interest (see: Judgment of 20 May 2002 by the Constitutional Court in the case No. 2002-01-03, Concluding Part, Judgment of 16 December 2005 by the Constitutional Court in the case No. 2005-12-0103 , Para 21.3 of the Concluding Part and Judgment of 14 December 2005 by the Constitutional Court in the case No. 2005-10-03, Para 8).

The right to own property also include the right to decide on issues related with the property.

9. In order to assess compliance of the contested norms with Article 105 of the Satversme, first of all it is necessary to investigate whether the norms restricted the rights established in Article 105 of the Satversme.

The contested norms prohibited the stockholders to arbitrarily establish procedure for taking decisions regarding introduction of amendments into the articles of association, changes of fixed assets, emission of convertible bonds, reorganization of the company, signing, amending or terminating of a group agreement, incorporation of the company, giving consent to incorporation thereof and continuation of cease of functioning. The contested norms provided that such decisions can only be taken if not less than three quarters of the stockholders with voting rights have voted for. Moreover the norms did not allow establishing, in the articles of association, a larger number of necessary votes for taking such decisions.

A stock company creates the content of human rights regarding property rights for, and natural stockholders only have the right to decide on issues mentioned in the second part of Section 284 of the Commercial Law, as well as to take decisions regarding them. The decisions mentioned in the second part of this section apply to shares of the company; however the legislator has established an imperative procedure for taking such decisions. Although these decisions are substantial since they can affect the extent of property rights of each stockholder, the stockholders are forbidden to deliberately establish the procedure for taking such decisions.

Consequently, the contested norms did restrict the right to own property established in Article 105 of the Satversme.

10. The constitutional Court has already recognized that property rights can be restricted if the restriction is justified, namely, if it has been established by law, have a legitimate objective and are proportionate (see: Judgment of 14 December 2005 by the Constitutional Court in the case No. 2005-10-03, Para 8). Therefore it is necessary to assess whether the restriction of the basic rights comply with the following requirements:

10.1. In order to assess compliance of the restriction included in the contested norms with Article 105 of the Satversme, first of all it is necessary to examine whether the restriction of property rights of the Applicant has been established by law.

As the ECHR has already indicated, the restriction has been established “in accordance with law” if it complies with several criteria. Namely, first of all, the restriction must be provided for in the domestic law, secondly, the law must be available to a person and thirdly, it must be clear enough (see: Judgment of the ECHR: The Sunday Times v United Kingdom, judgment of 26 April 1979, Series A, No. 30, Para 49; Silver and others v The United Kingdom, judgment of 25 March 1983, Series A, No. 61, Para 86, 87, 88). In the case under consideration, there is no dispute whether the restriction of the basic rights included in the contested norms comply with any of the abovementioned criteria.

Consequently, the restriction of the basic rights has been established by law.

10.2. Circumstances and arguments why it is needed shall be the basis for any restriction of fundamental rights, namely, the restriction is determined because of significant interests – the legitimate aim (see: Judgment of 22 December 2005 by the Constitutional Court in the case No. 2005-19-01, Para 9, Judgment of 14 March 2006 by the Constitutional Court in the case No. 2005-18-01, Para 13 and Judgment of 22 November 2008 by the Constitutional Court in the case No. 2008-07-01, Para 10).

During the Constitutional Court proceedings, the institution that has adopted the contested norm, which is the Saeima, has the duty to name and justify the legitimate objective of the restriction. It has been indicated in the reply of the Saeima that the objective of the contested norms it to protect the interest of stockholders (especially minority stockholders). As to majority stockholders, it has been established in the Law that important decisions are taken by the majority of votes, which is not less than three quarters of the votes of the stockholders with voting rights present. The Saeima also emphasizes that states have been conferred freedom of action regarding dealing with the issue of the rights of minority stockholders. By providing for the necessity of such majority of votes, protection of the interests of the minority is ensured (see: case materials, pp. 182).

In the legal literature, too, it has been admitted that it is necessary to protect the interests of the minority stockholders. It has been indicated that in stock companies the procedure of decision-making is not democratic since it is rather based on the amount of the stocks invested. There dominates the principle “the grater is participation of the member in the core capital, the more votes he or she has”. In the result of this, there can be a situation formed than property rights of minority stockholders are neglected [see: Strupišs A., Komerclikuma komentārs. Jurista Vārds, 2000, No. 32(185), pp. 4].

Provisions regarding participation in the core capital and the right to vote are advantageous for those who own more than 50 percent of the core capital. This power manifests itself through the possibility to determine the fate of the stock company. Therefore strengthening of the protection of the minority stockholders is regarded as a necessary measure. In order to prevent risk that the majority stockholders would take important decisions by themselves, a greater protection must be provided by law. This implies factual circumstances, in which the minority stockholders have the possibility to block, in a legal way, any decision of the majority or the possibility to realize their own will disregarding negative attitude of the majority (see: Eisenhardt U. Gesellschaftsrecht. 10. Auflage, München: Verlag C.H. Beck, 2002, Rn. 270, 367).

The Applicant has not contested the regulation that provides for the qualified majority of votes necessary for taking decisions but it has contested the prohibition to establish, in the articles of association, a larger number of votes necessary for making such decisions in the articles of association unlike it has been provided for by law. Therefore the Constitutional Court has no reason to assess the regulation included in the Commercial Law insofar as it concerns the minimum number of votes necessary for taking a decision.

The Saeima has indicated in its reply that, observing such prohibition established by law, the interests of different persons are balanced because there is a need for imperative regulation in respect of many issues in order to ensure existence and functioning of a company observing the large number and relatively fast change of stockholders.

The Constitutional Court agrees with the viewpoint that the prohibition provided for in the contested norms to establish a larger number of votes necessary for taking important decisions must be assessed in conjunction with other norms of the Commercial Law, namely, Section 275 thereof. At the moment of adoption of the Commercial Law it provided that a meeting of stockholders is entitled to take decisions irrespective of the equity capital represented there if the articles of association do not specify a representation norm. Both of the norms, Section 275 and the second part of Section 284 of the Commercial Law are directed towards the aim not to permit blocking of taking important decisions by the majority stockholders by voting against the amendments proposed by the majority or by ignoring the meeting (see: Opinion of A. Lošmanis, case materials, pp. 178).

It has been stated in the legal literature that protection of the minority stockholders may not become dictate of the minority, in the result of which the rights of the majority would be violated [see: Strupišs A. Komerclikuma komentārs. Jurista Vārds, 2000, No. 32(185), pp. 4]. It has also been recognized in other states that it is necessary to protect the rights of the majority by simultaneously ensuring sufficient protection of the rights of the majority (see, e.g.: Vutt A., Vutt M. Defending the Rights of Minority Stockholders in Estonia. Juridica International 1999, pp. 160-161).

There has been a principle established in the legal acts of the European Union that it is necessary to ensure an equal protection of stockholders. Article 42 of the Second Council Directive 77/91/EEC of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies with the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent provides: "For the purposes of the implementation of the Directive, the laws of the Member States shall ensure equal treatment to all shareholders who are in the same position". The abovementioned principle has been recognized in the legal systems of several Member States of the Community (see: Conclusions of the Advocate-General Verica Trstenjak submitted on 4 September 2008 in the case No. C-338/06 “Commission of the European Communities vs. the Kingdom of Spain").

Consequently, the objective of the restriction is to balance the interests of stockholders and protect the rights of them, which among all other things include the rights to own property.

Consequently, the contested norms envisage protection of a legitimate objective - protection of the rights of other persons.

10.3. Having assessed proportionality of the restriction, the Constitutional Court must now investigate several other questions. First of all, whether the measure selected by the legislator is fit for reaching the legitimate objective. Second, whether there exist other less restrictive measures for reaching the legitimate objective. Third, whether the benefit for the society from the restriction is greater than the harm done to the rights and legal interests of a person. If it would be recognized that the legal norms do not comply with any of these criteria, then they would be recognized as non-compliant with the principle of proportionality and thus unlawful (see: Judgment of 19 March 2002 by the Constitutional Court in the case No. 2001-12-01, Para 3.1 of the Concluding Part and Judgment of 22 November 2008 by the Constitutional Court in the case No. 2008-07-01, Para 11).

By means of the Law of 14 February 2002, the Saeima has introduced amendments to Section 275 of the Commercial Law by providing for a possibility to establish, in the articles of association, the minimum equity capital or representation norm. However, no amendments were made to the second part of Section 284 of the Commercial Law. In this situation it was possible to provide in the articles of association that the respective important decisions can only be made if 90 percent or even 100 percent of stockholders are present at the meeting. This allowed providing such regulation in the articles of association that blocked decision-making process. Thus the regulation included in the contested norms could not prevent blocking of decision making and with the measure selected it would not be possible to ensure the possibility of the company to function (see: Opinion of A. Lošmanis, case materials, pp. 178).

Consequently, the measure included in the contested norms is not fit for reaching the legitimate objective.

11. The Constitutional Court cannot find a rational explanation for the prohibition included in the second part of Section 284 of the Commercial Law to establish, in the articles of association, a larger number of votes necessary for taking important decisions. In order to establish, in articles of association, that more than three quarters of votes are necessary to adopt important decisions, the majority should vote for such wording of the articles of association. Consequently, such provisions can be included into the articles of association only if the majority would vote for.

Experience of other states, too, show that it is permitted to establish, into articles of association of other companies, a larger number of votes necessary if compared to what has been established by law. For instance, the first part of Section 300 of the Estonian Commercial Law provides that any decisions regarding amendments to articles of association of a company shall be adopted by two thirds of the stockholders with the voting rights present unless the articles of association provide for a larger number of votes. It follows that it is prohibited to establish, in the articles of association, a smaller number of votes, though it is allowed to provide that a decision regarding amendments to the articles of association shall be adopted unanimously.

The first part of Section 704 of the Liability Law of Switzerland provides that decisions on important issues (including introducing amendments to the articles of association of a company) shall be adopted by two thirds of the votes of shareholders represented in a meeting. On the other hand, the second part of this section provides for a possibility to provide, in the articles of association, a larger number of necessary votes or to establish additional provisions regarding adoption of the above mentioned decisions. Like in Estonia, it is not allowed to establish, in the rights of Swiss companies, a smaller threshold of the majority of voices (see: Meier-Hayoz A., Forstmoser P., Schweizerisches Gesellschaftsrecht. 10. Auflage, Bern: Stämpfli Verlag AG, 2007, §16 Rn. 255, 379).

The first and the second part of Section 179 of the Germany Law on Shares provide that any amendments to articles of association shall be adopted by three quarters of the equity capital represented in a meeting. It is possible to provide for a different majority of capital (votes) in articles of association. The field of activities of a company, however, can only be changed by a larger number of majority votes. It is also possible to provide, in articles of association, for conditions of introduction of amendments to articles of association.

As it can be concluded, the legal regulation of Germany, unlike the Estonian and Swiss law, allows establishing, in articles of association, any necessary number of votes necessary for introducing of amendments to articles of association (except for the change of the field of activities of a company). Consequently, it is possible to establish, in articles of association, both, the principle of unanimity and representation norm for adoption of certain decisions, as well as a precondition of receiving consent from stockholders for a decision to come into force (see: Hüffer U., Aktiengesetz, 8. Auflage, München: C.H. Beck, 2008, § 179, Rn. 23).

The fact that on 18 December 2008 the Saeima has adopted a law amending the second part of Section 284 of the Commercial Law only confirms the fact that the previous regulations was not any good solution. The aforesaid is also confirmed in the letter of the Saeima wherein it was recognized that the amendments have been introduced with a view to improve the contested regulation (see: case materials, pp. 200).

Consequently, the restriction is not proportionate, and the contested norms in the wording that was valid up to 21 January 2009 do not comply with Article 105 of the Satversme.

12. Having established the non-compliance of the norms with Article 105 of the Satversme, it shall be recognized as unlawful and invalid. Consequently, it is not necessary to assess compliance of the contested norms with Article 1 of the Satversme.

13. The constitutional claim has been submitted in order to contest the second part of Section 284 in connection with the second part of Section 142 of the Commercial Law, which both prohibited establishing, in articles of association of a company, a larger number of votes for adoption of important decisions. On 18 December 2008, the Saeima provided for another regulation by amending the second part of Section 284 of the Commercial Law. The new regulation allowed providing for a larger number of votes necessary for adoption of important decisions. Consequently, the regulation that follows from the second part of Section 284 in connection with the second part of Section 142 of the Commercial Law has become invalid. Moreover, by means of this decision, the second part of Section 284 of the Commercial Law is declared as not fit for reaching the legitimate objective. Consequently, it is not necessary to assess compliance of the second part of Section 142 of the Commercial Law with the Satversme.

Based on Articles 30 – 32 of the Constitutional Court Law,

The second part of Section 284 of the Commercial Law in the wording that was valid before 21 January 2009 insofar as it prohibited establishing, in articles of association of a company, a larger number of votes necessary for adoption of important decisions regarding the stock company "Latvijas Gāze" does not comply with Article 105 of the Satversme of the Republic of Latvia from the moment of adoption of this norm.

The Judgment if final and not subject to appeal.

The Judgment takes effect on the date of publishing it.

The Presiding Judge G.Kūtris