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Financial Participation

The legal framework for employee financial participation has its origins in the privatization process in the 1990’s. The most important form is employee share ownership.

Employee Share Ownership

Employee share ownership has several sources: the privatization process, shares in enterprises owned by the state and municipalities, and employee shares in private companies.

The privatization of state-owned enterprises started with the so-called “small privatization” in November 1991, in accordance with the Law on the Privatization of Objects of Trade, Catering and Services.1 Among the possible privatization methods stated in the law was the sale to employees. Employees who had been working in the enterprise for at least 5 years had a pre-emptive right to buy shares at the initial price. This legislation was changed in February 1992 and the pre-emptive right abolished. The companies were also allowed to issue shares with a value of up to 10% of the authorised capital and to sell them to employees at a discount, or to transfer them free of charge.2 All employee shares had full voting rights. The privatization legislation also provided for the possibility to lease an enterprise with a purchase option. This was used especially by management. This leasing option was abolished in 1994 on the adoption of the new Law on Privatization (adopted on 17 February 1994 and still in force – with amendments). Employees could now use vouchers, which they had received through the 1992 Law on Privatization Certificates (Vouchers), to pay for publicly offered shares in their enterprise. As a way of terminating the privatisation process earlier, a specific law “on the termination of the privatization of state and communal property and the use of vouchers” came into effect in 2005. The law stipulated that privatization applications were to be filed by 31 August 2006 at the latest. A number of them are still being processed.3

The privatization process is still not completed in Latvia and it is now regulated by the 1994 Law on the Privatization of Objects owned by the State or a Municipality, the 8 July 1996 Law on the Reorganisation of State and Municipal Enterprises in Corporations, and the 2005 law on the termination of the privatization of state and communal property and the use of vouchers”. According to these laws, shares of state-owned corporations can be sold to employees in the course of privatization below the nominal value of such shares. These shares cannot amount to more than 20% of the share capital of the particular company. Management buy-out can be applied if the company has no tax debts, no salary debts to employees and no other debts or encumbrances amounting to more than 10% of the equity capital. In this case, up to 25% of the shares can be sold to the management.

In 2001 a Law on State and Municipal Corporations was adopted. According to it, the Latvian government or the respective municipal authority decides in which state or municipal company employees’ shares can be issued. Employee shares can only belong to employees and board members and cannot be transferred to other persons, even to other employees. If the employee leaves the company, his / her shares are transferred back to the company.

Employee share ownership can also arise from share ownership in private companies. This situation is regulated by the Commercial Law, which was adopted in 2000 and came into effect in 2002. It defines two forms of companies: limited liability companies, and joint-stock companies. Special employee stock ownership regulations are in force only for the latter. Joint-stock companies can issue employee stock which can be acquired by all employees, including managers. Employee stock has no voting rights and no right to a liquidation quota, but it can be sold, if the Articles of Association do not provide otherwise. It can be issued only out of a company’s net profit and its total value cannot exceed 10% of a company’s registered equity capital. The company’s own capital cannot become less than the registered capital. If an employee leaves the company, this has a pre-emptive right to acquire the employee stock.

Profit-sharing

There are no special regulations regarding profit-sharing in Latvia. It is explicitly possible to declare salaries as dependent upon profit and to provide benefits in form of premiums as well as other benefits directly linked to profit. However, all benefits will be subject to personal income tax of 25%. On the other hand, dividend payments are tax-free, which means that any benefits paid out as dividends will be 25% higher than salary benefits. The tax regulation has thus created an incentive for share ownership and a disincentive for profit-sharing.

Cooperatives

Cooperatives are regulated by the 5th February 1998 Law on Cooperatives. It states that cooperatives are voluntary associations of persons created for the purpose of providing services to increase the efficiency of the economic activities of its members. All cooperatives are either commercial or non-commercial. The purpose of commercial cooperatives is to make a profit, whereas non-commercial ones are aimed at improving the management of property belonging to cooperative members. The right to vote in cooperatives does not depend upon the amount invested and each member is entitled to one vote only. Each member is also entitled to participate in the management and to dividends from profits, which will be divided according to the investment of the respective member and the cooperative’s Articles of Association. The cooperative’s organs are the Members’ Meeting, the Board and the Supervisory Council. Profit is distributed as dividends, which are, however, often used to provide reserve capital. The Members’ Meeting decides on the distribution of any remaining profit.

Wilke, Maack and Partner (2014) Country reports on Financial Participation in Europe. Prepared for www.worker-participation.eu. Reports first published in 2007 and fully updated in 2014.