A judgment in the case on a norm of the Credit Institution Law has been adopted
On 19 October 2011, the Constitutional Court adopted a judgment in the case No. 2010-71-01 “On Compliance of Section 59.5 of the Credit Institution Law with Article 1 and Article 105 of the Satversme of the Republic of Latvia”.
Infringement of fundamental rights
Restriction of property right of credit institution minority shareholders by establishing a procedure for increasing equity capital.
Contested Norm
Section 59.5 of the Credit Institution Law:
“(1) If the Cabinet of Ministers, based on a request of a credit institution, has adopted a decision regarding acquisition of substantial assistance provided by the State or increase of equity capital of a credit institution, a credit institution council shall have the right, without summoning a meeting of shareholders, to adopt a decision on behalf of the meeting of shareholders regarding increase of equity capital of a credit institution and to approve provisions for increasing of equity capital.
(2) In cases mentioned in Paragraph 1 of this Section, present shareholders of a credit institution shall not have the priority right to obtain shares of the new issuance.
(3) By increasing equity capital in the case mentioned in Paragraph 1 of the first part, amendments to articles of association of a credit institution shall be adopted by its council. If within the term established in the provisions regarding increase of equity capital, the nominal value of all shares of the new issuance has not been paid, then increase of equity capital shall not be regarded as executed and amendments introduced into the articles of association shall become null and void as from the date of adopting them.”
The Facts
Initial participation share of the Applicants, namely, seven foreign and European Union based legal persons in the JSC “Parex banka” was 8.4 per cent of its equity capital before adoption of the contested norm.
The Board of the JSC “Parex banka” addressed a request to the Cabinet of Ministers to materially increase its participation share of the equity capital. On 24 March 2009, 13 October 2009 and 23 February 2010, the Cabinet of Ministers adopted decisions regarding considerable increase of the participation share of the State in respect to the equity capital of “Parex banka”. According to the above mentioned decisions and Section 59 5 of the Credit Institution Law, JSC “Parex banka” Council adopted several decisions regarding increase of the equity capital of JSC “Parex banka” by amending its articles of association and confirming provisions regarding increase of the equity capital (share issuance).
As a result, the initial equity capital of JSC “Parex banka” was considerably increased, whilst participation share of the Applicants in the equity capital of JSC “Parex banka” reduced to 2.1 per cent.
Constitutional Complaint
The Applicants hold that reduction of the participation share has caused legally and economically disadvantageous consequences for them, namely, influence of the minority shareholders onto administration of the society has reduced, and the amount of dividends to be disbursed to the Applicants and value of shares owned by them as well.
By referring to judgment of 4 February 2009 by the Constitutional Court in the case No. 2008-12-01, the Applicants emphasize that the right to own property also include the right to decide issues related with the property, including changes in its participation share. It follows from Para 9 of the above mentioned judgment of the Constitutional Court that adoption of a decision regarding change of capital amount cannot be commissioned to any institution or person of administration of a stock company or a person; it can only be delegated to all stockholders. The regulatory framework, according to which the shareholders meeting was prohibited to participate in deciding such important issue as increase of equity capital, restrict the right to own property established in Article 105 of the Satversme.
The Applicants also indicate that legal regulatory framework on increase of the equity capital included in the Commercial Law has been co-ordinated with the Directive 77/91/EEC, the purpose of the latter being ensuring protection of minimum shareholders’ rights in the Member States of the European Union. Pursuant to conclusions made in the case-law of the European Union, provisions of the Directive 77/91/EEC in respect to credit institutions are applicable at the same extent as to any enterprise of the Member States paying a major role in the national economy of a particular state. Article 25 ad 29 of the Directive shall be applicable also to those share companies wording in the banking field.
Pursuant to Article 25 (1) of the Directive, this is the shareholders meeting, i.e. the shareholders who decide on increase of equity capital.
The Applicants recognize the legitimate aim of the contested norm; however, they hold that there exist other measures for reaching of the legitimate aim restricting the rights of the Applicants at a lesser extent. Intervention in voluntary liabilities and rights of shareholders in favour of the State as a person subject to private law shall be regarded as inappropriate for a law-governed State. Therefore the contested norm fails to comply with the principle of proportionality and that of legitimate expectations.
Findings of the Court and the Decision
Regarding the meaning of the term “property” in the context of Article 105 of the Satversme
The Constitutional Court indicated that if it follows from norms of the European Convention for the Protection of Human Rights and Fundamental Freedoms and interpretation thereof in the case-law of the EHCR that particular human rights enshrined in the Convention apply to the present situation, then the situation usually falls within the scope of respective fundamental rights enshrined in the Satversme. However, if the human rights enshrined in the Convention do not apply to the present situation, then this does not mean yet that the situation fails to fall within the scope of respective fundamental rights enshrined in the Satversme. In such a case, the Constitutional Court is committed to investigating whether circumstances proving that the Satversme establishes a higher protection level for the fundamental rights exist [21.1].
The Constitutional Court did not share the viewpoint that the term “property” used in Article 105 of the Satversme does not apply to shares owned by the Applicants, which would lead to non-existence of the restriction of the fundamental rights established in Article 105 of the Satversme [2.2.4] because the fact that the Applicant owns shares in a company undergoing financial problems does not exclude them from the scope of Article 105 of the Satversme [12.2.3].
Regarding the scope of Article 105 of the Satversme
When assessing the requires of the Saeima [Parliament] to terminate legal proceedings because the Applicants have not yet exhausted all legal remedies to protect their rights, the Constitutional Court concluded, among the rest, that the contested norm as such does not request depriving of the status of an owner or the possibility to receive dividends or liquidation quota due to owned shares in case of financial situation of a credit institutions permits it. Likewise, the right to participate in shareholder meetings of a credit institution, if any, or exercise of other stipulated rights of a shareholder is not denied. Consequently, the contested norm does not fall within the scope of the fourth sentence of Article 105 of the Satversme [13.1].
Having assessed its own case-law, that of the EHCR and constitutional courts of other states, as well as the nature of the Directive 77/91/EEC as an instrument for establishing the minimum protection standard in respect to shareholders’ rights and its place in the commercial law, and the fact that Article 25 and Article 29 of the above mentioned Directive have been elaborated taking into consideration protection of the fundamental rights of shareholders exercised in the Member States, the Constitutional Court has concluded that thereby the contested norm pertains to the scope of the first, the second and the third sentence of Article 105 of the Satversme and establishes restriction of the fundamental rights enshrined therein [13.4].
Regarding the principle of subsidiarity in legal proceedings before the Constitutional Court
Likewise, the Court indicated that the purpose of the Subsidiary principle is to ensure that the court, when examining a case on its matters, would first apply methods of application and interpretation of rights at its disposal to reach a result that would comply with the Satversme, and only in the case of failure to ensure the desired result it would lodge an application before the Constitutional Court [14].
The Court rejected the request of a Saeima representative regarding termination of the legal proceedings by indicating that the Applicants do not have the possibility to eliminate the infringement of their fundamental rights by general remedies because exhaustion of such remedies that are not directly related with protection of the fundamental rights established in the Satversme and are aimed only at ensuring of application of EU law shall not be regarded as pre-condition for a person to have the right to address the Constitutional Court [14.4].
Regarding the possibility to restrict the fundamental rights established in Article 105 of the Satversme under circumstances of economic crisis
The Constitutional Court reiterated that disregarding economic situation of the State the legislator is committed to ensure the fundamental rights of persons established in the Satversme [16].
Article 105 of the Satversme includes not only the property right but also the right of the state to restrict use of property in the interests of the society. The Constitutional Court has already concluded in its case-law that, in order to asses constitutionality of a restriction of the fundamental rights established in Article 105 of the Satversme, it is necessary to investigate whether the restriction has been established by law, whether it has a legitimate aim and whether it complies with the principle of proportionality [17].
Regarding the fact whether the restriction of the fundamental rights has been established by a property adopted law
When assessing the adoption procedure of the norm, the Constitutional Court referred to its case-law wherein it has established that procedure of the Saeima is also established by parliamentary practice insofar as they do not contradict the Saeima Rules of Procedure. Pursuant to the Saeima Rules of Procedure and normative acts regulating the work of the Legal Bureau of the Saeima, as well as parliamentary traditions of the Saeima, the Legal Bureau is committed to procure, as much as possible, that members and committees, and particularly the responsible ones, of the Saeima would have, at their disposal, professional information on compliance of a draft laws or a suggestions with the Satversme, international liabilities of Latvia and EU rights, as well as its compatibility with the Latvian legal system. However, responsible committees are committed to timely submit materials at the disposal of the Legal Bureau and to be examined at a commission meeting, as well as to hear an opinion of the Legal Bureau regarding the draft law and suggestions and to assess argumentation provided by the Legal Bureau [18.2].
The Constitutional Court drew attention to cases when a legal office is not given enough time to investigate constitutionality of suggestions, which, according to the Court, comprises the risk that a norm that fails to comply with the fundamental rights can be adopted. Such action of the Budget Committee contradicts Section 106 of the Saeima Rules of procedure and parliamentary traditions. Consequently, it shall be regarded as breach of parliamentary procedure; however, beach of parliamentary procedure cannot serve as grounds for considering that an act to be adopted has no legal force. To recognize an act as null and void due to breach of parliamentary procedure, it is necessary to substantiate the doubt that in case of observance of the procedure the Saeima would have adopted a different decision. In the particular case, there was no such doubt. Therefore the Court recognized that the restriction of the fundamental rights has been adopted by a properly adopted and proclaimed law [18.4].
Regarding the legitimate aim of the restriction of the fundamental rights
The Constitutional Court established the legitimate aim of the restriction of the fundamental rights, which is protection of the interests of depositors, restoration of trust into domestic bank system and assurance or general financial stability by preventing threats to financial stability of a credit institution [19.1], i.e. assurance of welfare of the society and protection of rights of other persons. The Court indicated that the situation when shareholders on one bank would gain benefit from increase of equity capital by means of State aid, whilst shareholders of another bank are denied such possibility would be impermissible. Restrictions aimed at ensuring of fair competition have been established for a legitimate aim, namely, protection of the rights of other persons [19.2]. Restrictions aimed at ensuring that shareholders of a credit institution would undertake a proportional burden when rescuing the credit institution when compared to the burden undertaken by taxpayers in case if the credit institution is granted State aid have a legitimate aim, which is assurance of welfare of the society [19.2].
Regarding proportionality of restrictions of the fundamental rights
When assessing whether the contested norm reaches its legitimate aim, the Constitutional Court took into account several aspects and concluded the following: insofar as the aim of the contested norm is increase of equity capital, the aim has been reached [21.1]; insofar as the aim of the contested norm is to effectively increase equity capital by reducing participation share of former shareholders, the aim has been reached [21.2]; however, insofar as the aim of the contested norm is to effectively increase equity capital by also reducing participation share of former shareholders, reaching of such aim does not require refusal to summon a shareholders meeting [21.2]. Moreover, insofar as the aim of the contested norm is to effectively increase equity capital, the contested norm fails to reach the aim because it prohibits using private resources at the maximum extent to rescue the bank [21.3].
The Constitutional Court drew attention to several alternative means of reaching of the legitimate aim, for instance, reducing of the term for summoning of shareholders meeting to reach the legitimate aim, which is to reduce time needed for summoning shareholders meeting [22.2]. However, when assessing argumentation of the Applicants regarding application of the Bank Overtaking Law as an alternative measure, the Court indicates that action of the State resulting in improvement of financial status of a credit institutions permits shareholders to preserve their status of an owner and exercise the rights related with their shares. Consequently, application of the Bank Overtaking Law cannot be regarded as the measure that would restrict the rights of shareholders at a lesser extent [22.1]. When assessing the aforementioned and other aspects, the Court concluded that the legislator had the right to reach the legitimate aim by other alternative means that would infringe the fundamental rights of persons at a lesser extent [22.4]
The Constitutional Court has already drawn attention to the fact that, on the one hand, the contested norm has been adopted based on the context of the situation of “Parex banka”, though, on the other hand, application possibilities of the contested norms are broader, namely, it can be applied to situations other than concerning the particular person subject to law and situation of the spring 2009 when the equity capital of “Parex banka” was increased to rescue the bank [23.1].
The contested norm expressis verbis includes only two pre-conditions of applications thereof, namely, a request of the board and a decision of the Cabinet of Ministers. The norm provides no conditions that would restrict its application by means of extraordinary circumstances; neither provides it that it is applicable only in respect to banks playing the major role in the national economy or only in case it if is indispensible to ensure compatibility of State aid with the common European market. The contested norms contains no reference to other specific conditions established by the Saeima representative and the summoned persons in the case of “Parex banka” [23.3]. Consequently, the Court concluded that not every case whenever a credit institution is granted restructuration aid would contradict the common EU market only due to the fact that former shareholders of the credit institutions have the possibility to exercise their pre-emptive right [23.3].
After having analysing the structure of the norm, the Constitutional Court concluded that the contested norm contains no restrictive criteria establishing that it would be applicable only if it is not possible to rescue the bank by other means [23.7]. The second part of the contested norm expressis verbis prohibits former shareholders of the bank to participate in increase of equity capital [23.8]; however, it follows from the case materials that, when applying the contested norm, the Cabinet of Ministers could establish its true sense. Therefore there is no reason to consider the contested norm as unclear. Nonetheless, the Constitutional Court drew attention of the Saeima to the fact that the contested norm has an awkward wording from the point of view of judicial technique [23.8.].
The contested norm has been adopted when the State had to adopt many decisions restricting the fundamental rights of persons to eliminate consequences of the economic crisis. Often, the element of such regulatory frameworks ensuring proportionality was their temporary character, which was clearly stated in a particular normative act. Materiality of such infringement is usually reduced by the fact that a restriction of rights is established only for a considerable time frame. However, no validity term has been established for the contested norm [23.9].
The contested norm confers a broad margin of appreciation to a state administration institution, i.e. the Cabinet of Ministers to interfere with private law relations and determine the way of increasing of equity capital, namely, in accordance with the contested norm or pursuant to a procedure established in the Commercial Law; however, the contested norm fails to establish the right of persons to verify, by mediation of courts, whether, in a particular case, the restriction imposed on their rights is proportional. Moreover, the contested norm does not commit the Cabinet of Ministers, the bank council or board to informing shareholders on planned or on-going increase of equity capital and provide substantiation for the necessity to do so. The Court indicated that the State had the possibility to elaborate the contested norm in a way to prevent the present situation [23.10].
The benefit gained by the society from the contested norm is related with successful rescuing of one of several important credit institutions ensuring welfare of the society in the long term; however, restrictions to the rights of shareholders applying to the internationally recognized minimum of rights not only influence the fundamental rights of the Applicants but also may raise doubt among international investors regarding Latvia as a state safe for making investments. As the consequence, investment flow may reduce and existent investments may flow away. In the long term, this might have a negative impact on welfare of the society [23.11].
When assessing the above mentioned conditions, the Court recognized that the extent of restrictions established in the contested norm is greater than needed to reach the legitimate aim; moreover, there are also other means ensuring reaching of the legitimate aim and restricting the rights of persons at a lesser extent. Benefit gained by the society does not compensate the restrictions. Consequently, the Constitutional Court recognized the regulatory framework of the contested norm as the one restricting the fundamental right to own property in a non-proportional way and non-compliant with Article 105 of the Satversme [23.11].
Regarding the date as of which the contested norm would lose its force
When establishing the date, as of which the contested norm would lose its force, the Constitutional Court took into account not only rights and interests of the Applicants but also those of other persons. Likewise, the court assessed infringement of the rights of the Applicants in case if the contested norm would not have been found as null and void as from the date of adopting it and possible infringement of rights of other persons in case if the contested norm would not have been found as null and void as from the date of adopting it, as well as investigated proportionality of such infringements [26].
In the period exceeding one year and a half as from the date of coming into force of the contested norm when the Applicants addressed the Constitutional Court, “Parex banka” continued its economic activities; likewise, rights and duties of persons subject to private law who are not related with increase of the equity capital of “Parex banka” have emerged and a joint-stock company “Citadele banka” has been founded. The Court drew attention to the fact that recognition of the contested norm as null and void as from the date of adopting it would cause legal insecurity and negative reaction of the financial market, which would thus impact financial stability and social security of the State. In such a case, not only other persons but the Applicants acting as shareholders would suffer [26].
The Court also took into consideration the fact that the Applicants have addressed the Constitutional Court only after the contested norm was applied to them three times [26].
A judgment of the Constitutional Court is final and not subject to appeal. It shall come into force on the date of publishing it, namely, 19 October 2011.
Linked case: 2010-71-01