On 18 December 2008, the Latvian Parliament (Saeima) passed amendments to the Commercial Law relaxing certain provisions of the Commercial Law that restricted freedom of shareholders of joint stock companies to specify in the company’s constitutive documents the number of votes needing to be cast in favor of a decision of general meeting of shareholders. The amendments entered in force on 21 January 2009 and thus predated by several days the ruling of Satversmes Tiesa (the Constitutional Court of Latvia) on the same subject matter rendered on 4 February 2009 and holding these restrictions unconstitutional.

Prior to the amendments the law required that decisions of shareholders’ meetings of joint stock companies are taken by a vote of a simple majority of shareholders present at the meeting, while certain fundamental decisions like amendments to the charter (articles of association) of the company, increase or decrease of the equity capital, issuance of convertible bonds, company’s reorganization and liquidation requited a vote of three quarters of the shareholders present. The companies were not allowed to vary these voting majorities in their constitutive documents. By the amendments to the Commercial Law of 18 December 2008 the above joint stock company shareholders’ meeting decision taking majorities were made as the statutory minimum of votes required to be cast in favor of a decision to be taken and the joint stock companies are now free to determine in their constitutive documents the decision taking majorities that are higher than these minimums.

Notwithstanding that the amendments to the Commercial Law had cured the contested issue, on 4 February 2009 Satversmes Tiesa took a decision not to stay its proceedings on a complaint of a private person – a shareholder in a joint stock company, alleging unconstitutionality of the provision of the Commercial Law under which the joint stock company was not permitted to provide in its constitutive documents the shareholders’ meeting decision taking majority that was higher than the one required by the law, and rendered a full ruling on the contested issue. Satversmes Tiesa recognized the provision as being in breach of persons’ constitutional right to property. In addition, it declared the provision as void ab initio in respect of the joint stock company whose shareholder the complainant was. This is the first ruling of the Latvian Constitutional Court on the matters of Latvian corporate (company) law.

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The new regulation of business transactions will preempt application of any inconsistent provisions of the Latvian contract law. The new regulations will also apply to business transactions with consumers except to the extent specified otherwise in the consumer protection law.

The new regulation of commercial transactions will, inter alia, for the first time in Latvia regulate such transactions as franchise agreements, factoring and leasing transactions none of which are currently specifically referred to or regulated by the Latvian contract law. In addition to these, specific provisions will be introduced in respect of commercial sale, commercial agency, expedition (transportation) and commercial storage transactions.

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On 18 December 2008, the Saeima passed a Bank Take-over Law specifying the grounds and procedures under which Latvia state through its entities or state-owned companies may voluntarily or involuntarily take-over the banks registered in Latvia, as well as their foreign branches, by forcing out some or all of the existing bank shareholders or taking over the assets or rights of the bank. The Law entered in force on 31 December 2008. The Law does not apply to the Latvian branches of the banks registered in other EU member states or in third countries.

According to the Bank Take-over Law, a bank may be taken over in a situation when stability of the Latvian banking system and smooth operation of its payment system is under a material threat or would be under such threat if the bank was not taken over and the bank therefore is not able or would not be able to meet the banking regulatory requirements. The take-over may be made either as a voluntary take-over on a basis of a contract or as a forced (involuntary) take-over pursuant to a specific law.

The bank take over process may be commenced either by the Finance and Capital Markets Commission (the Latvian banking supervisor) or the Bank of Latvia (the Latvian central bank) by making a motivated proposal to the Ministry of Finance. In case all of the Finance and Capital Markets Commission, the Bank and Latvia and the Ministry of Finance agree that there is a reason to take over the bank, the Ministry of Finance commences negotiations with the bank or its shareholders on the takeover. In case the agreement is reached within not more than 5 days, the matter is submitted to the Cabinet of Ministers (the Government) for its approval. In case the agreement is not reached within 5 days, the Ministry of Finance will propose a draft law on the take-over of the bank to the Cabinet of Ministers to be made as a legislative initiative to the Parliament.

The Bank take-over may be effected as a take-over of shares, assets, rights or obligations. If shares are taken-over in a forced (involuntary) take-over, the pledges and other encumbrances attached to the shares are discharged under the relevant take-over law unless the taking-over state entity has agreed to take them over. The secured creditors whose security interests are thus wiped out will have a priority right to the compensation paid for the shares, if any. There are no comparable provisions in respect of take-overs of assets or rights subject to pledge.

The law requires that in case of a forced (involuntary) take-over of the bank a fair compensation is paid to the shareholders, if shares are taken-over, or to the bank, if assets or rights are taken over, in the amount determined by the Cabinet of Ministers based on the bank’s value on the date when the take-over process was commenced. The Cabinet of Ministers has passed a specific Cabinet of Minister’s regulation on the determination of the compensation. According to this regulation, the amount of compensation payable to the shareholders or the bank is equal to the positive difference between the aggregate balance sheet value of the bank’s assets and the liquidation (fast sale) value of the bank’s assets. In essence, it means that no compensation is payable if the valuation committee appointed by the Finance minister would determine that the liquidation value of the bank’s assets is larger than their balance sheet value.

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During December 2008, the Parliament of the Republic of Lithuania (Seimas) passed several laws Amending the Law on Corporate Income Tax. The amendments increased the income tax rate for 2009 from 15% to 20% for the income of Lithuanian entities and permanent establishments of foreign entities, which are subject to taxes; for dividends and other distributed earnings, as well as for the financial support received, which exceeds 250 minimum standards of living and for earning of foreign entities, which were not received in their permanent establishments in Lithuania. The amendments also provided that income from increase in asset value for shares transfer is not subject to taxes, if shares were transferred to an entity under reorganization or other cases defined in the Law, and if such entity possessed 25 per cent of unit’s voting power for an unbreakable period of three years or more, the shares of which are being transferred. The amendments also abolished tax exemptions for corporate income tax of entities engaged in agricultural activities, credit unions and Central Credit Union. The amendments entered into force on 30 December 2008.

Seimas also passed several laws amending the Law on Value Added Tax. As a result of the amendments, standard value added tax was increased from 18% to 19%. The reduced value added tax rate shall be applied to heating energy, supplied to residential premises and to hot water, supplied to residential premises. The reduced value added tax of 5% will also be applied to medicines and medical products to full or partial compensation from the state medical insurance budget. It is also important, that the new reduced value added tax rate of 9% was established in respect of books and non-periodical publications, as well as periodical publications, provided that the subscription fees for the periodical publications for the 2009 were fully paid till 31 December 2008. What is more, the reduced value added tax rate of 5% may be applied to accommodation at hotels and other special accommodation services during 2009 if the booking was completed prior to 31 December 2008. The reduced value added taxes of 5% will be applicable only until the terms established at the law. The amendments entered into force on 1 January 2009, except those scheduled to enter into force at another time prescribed by the amended law.

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The observations from the stakeholders have now been submitted in reply to the Preliminary report by the European Commission on its inquiry in to the pharmaceutical sector. The report was issued last year, on 28 November 2008 and a final report is expected in late spring or early summer 2009.

The sector inquiry began with dawn raids at the premises of a number of pharmaceutical companies in Europe. The Commission supplemented this fact-finding with numerous and sometimes extremely detailed questionnaires to stakeholders, i.e. pharmaceutical companies, competition authorities, consumer associations, patent offices, patient associations and insurance companies. The result is a preliminary report of 426 pages.

What are the major findings stated in the preliminary report?

First, the Commission claims that the originator companies are using a variety of strategies, what the Commission calls a “toolbox” to delay or prevent the entry of generics in order to ensure continued revenue streams for their medicines. These include multiple patent applications around the same medicine (so called patent clusters), initiation of disputes and litigation, conclusion of patent settlements which constrain market entry of generic companies and interventions before national authorities when generic companies ask for regulatory approvals or in the pricing and reimbursement process.

There is currently a large debate underway on both sides of the Atlantic whether or not and under what conditions multiple patent applications can violate competition law. The Commission’s view seems to be that the two areas of law do not stand separate from each other, leaving itself open the option to prosecute any use of the patent system that it regard as abusive.

Second, the Commission found that the originator companies have developed “defensive patenting strategies” in order to block the development of new products by other companies. Another issue that has proven problematic relates to the numerous overlaps between patents held by different pharmaceutical companies. The inquiry revealed that at least in 1,100 cases across the EU the patents held by an originator company might overlap with the R&D program and/or patents held by another originator company for their medicine. Finally, the preliminary findings revealed a high number of contractual agreements between originator companies, the majority concerning the commercialization phase.

One issue, which was commented on already at the public presentation of the preliminary report on 28 November 2008 is that the report does not examine competition among generic companies as such even though the preliminary report mentions misuse of the regulatory system by “some (generic) applicants, who use various ways of making “unnecessary” bookings in order to delay access for other applicants. Nor does it deal with parallel trade issues within the EU. However, one of the dawn raids in the second wave was aimed at a generic company.

What practical impact will the preliminary findings have on the pharmaceutical industry as a whole?

The report contains a number of allegations that appear to challenge practices that are fairly common within the industry. While the report is not definitive or even conclusive, it is rather unlikely that the Commission will be convinced that its findings are wrong. In fact, Commission officials have already conducted dawn raids in several Member States at the premises of a few pharmaceutical companies. In the press the Commission stated that the inspections were not related to the sector inquiry. However, the Commission did admit that the knowledge acquired during its sector inquiry allows it to draw conclusions on where to conduct “action based on competition law”. It would therefore appear more than likely that the sector inquiry will ultimately lead to further dawn raids and proceedings initiated by both the Commission and perhaps also by national competition authorities. Commissioner Neelie Kroes has also made statements that the Commission will not hesitate to open anti-trust cases.

A new chance for the EU patent system?

In view of the efforts and resources put down in this sector inquiry, it seems likely that the pharmaceutical sector will continue to be at the center of the Commissions attention and that it will take active steps also in other areas, i.e. not limited to competition law, in order to enhance competition in the market. It should not come as a surprise if the Commission will use this report to build support for the harmonization of the EU patent system. It is likely that further legislative proposals to bring about such harmonization will be put forward on this in due course. Initiatives for harmonization of the EU patent system have been sought by the Commission for years, but have failed, mainly on disagreements regarding languages and jurisdiction. It remains to be seen whether this time will be any different.

Could there be other causes of generic delay?

In respect of the regulatory issues, the Commission noted that there appear to be bottlenecks in the approval and marketing of medicines, which delay products coming to the market. For example, some agencies lack adequate resources and there are discrepancies in assessment criteria on marketing permissions and national pricing and reimbursement procedures which create delay and uncertainty. Some commentators have even gone as far as to ask whether the delays for generic products are not caused by administrative problems rather than the toolbox. It remains to be seen whether these concerns will be addressed by the Commission in the final report.

Is the report of any relevance for other industries?

The distinctive features of the pharmaceutical sector may lead people to the conclusion that the Commission’s view (and criticism) will only affect companies active in that sector. This approach can be dangerous. There are several industries where the competition for different reasons is less well functioning, which from this perspective can be compared with the pharmaceutical sector. Typical examples of such sectors are newly de-regulated sectors and markets with strong regulatory elements. Also, as IPLA and other commentators have concluded, many of the practices attacked by the Commission are inherent in the patent system. For example, the filing of divisional applications is a necessary part of the patent prosecution procedure, and companies in all sectors use the procedure in essentially the same way.

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