Over 4 000 private limited companies were established in Lithuania last year. This legal form of legal entity (together with small partnerships) has been one of the most popular in Lithuania for many years, and the founders of these companies (especially foreigners) still must consider several questions related to the establishment of the company. One of such questions is the management structure of the company. When advising foreign clients on the composition of the company’s managing bodies, we receive various queries, such as: how many directors can a company incorporated in Lithuania have? Can a company operating in Lithuania have a Board of Directors (a governing body common in other jurisdictions)? Can another legal person be the company’s director? How to limit the ability of a manager to act alone on behalf of the company?
In responding to these questions, it is important to consider several aspects. First of all, the Law on Companies of the Republic of Lithuania provides that the following managing bodies are obligatory in a company: the general meeting of shareholders and the manager of the company. The company may also have a management board and a supervisory board. In practice, aside from the regular shareholder’s meetings, companies typically have a sole management figure – the company’s manager (director). The establishment of a management board happens with a lower frequency.
It’s also essential to highlight that only one individual can hold the position of a company’s director in Lithuania. This means that appointing multiple natural or legal persons as directors is not permitted. Moreover, only an individual with legal capacity (natural person) can serve as a director, precluding the possibility of representation by another legal entity (a practice often observed in the establishment of limited liability companies in countries with offshore tax zones).
In practice, the question often arises as to when it is worthwhile to establish a board in a company. The Law on Companies of the Republic of Lithuania provides extensive powers for the company’s manager. The company’s manager is entitled to act unilaterally when dealing with other individuals on the company‘s behalf. When a management board is established in the company, it takes on some of the tasks initially handled by the manager while supervising and controlling the manager‘s activities. The manager, responsible for the day-to-day operations and achieving the company’s goals, might require additional scrutiny. In such cases, it is advisable to establish a management board to better regulate the manager’s activities.
In order to control what the company’s manager can do and reduce risks such as dishonesty or making unfavourable deals for the company, the company’s founding documents (the Articles of Association), can include specific rules for quantitative representation, i.e. the rules indicated in the Article of Association could say that only certain joint combinations are allowed to represent the company. These could be: a) a group of managing bodies together (e.g. a manager and a board member); b) a manager and one representative together (e.g. a manager and a proxy); c) a manager and one member from another managing body together (e.g. a manager and a supervisory board member); or d) a manager and one participant member together (e.g. a manager and a shareholder).
However, it’s important to note that having a specific number of people representing the company can have negative aspects as well. It’s not a very common way for a company to operate, and it might bring extra complications in daily business activities. For instance, using certain systems, like the self-service platform of the Companies Register could become more challenging. If a company’s corporate documents say that there should be a set number of representatives, the Companies Register doesn’t automatically give access to the self-service system for the company’s manager (or any other member of the management team). In such cases, the Companies Register asks for an additional Power of Attorney (following the rules for quantitative representation) to grant access to one specific person.
In the case of quantitative representation, all transactions on behalf of the company (even those of a very small value) must be signed by two or more persons each time, which can also create additional complications for the company’s day-to-day operations.
Please be aware that if a company has both a manager and a management board, the Law on Companies of the Republic of Lithuania already includes certain safeguards to restrict the manager’s independent decision-making. For example, as per this law, if a company has a management board, the board adopts decisions regarding the acquisition, transfer, or pledge of assets with a balance sheet value exceeding 1/20 of the company’s authorized capital.
Given the information provided above, it becomes crucial to assess the level of trust in the manager and his/her abilities to act independently when establishing a company. Additionally, the chosen structure of the company’s managing bodies should be considered, as it can impact the ease or difficulty of the company’s day-to-day operations.
If you have any additional inquiries regarding company formation or the roles of a company’s managing bodies, please feel free to reach out to us.