Merging an MB and a UAB in Lithuania: why conversion comes first

A small partnership (mažoji bendrija, MB) and a private limited liability company (uždaroji akcinė bendrovė, UAB) cannot be merged directly, and neither can be absorbed into the other. Only legal entities of the same legal form can take part in a reorganisation, and neither the Law on Companies nor the Law on Small Partnerships makes an exception for merging an MB and a UAB. So one of them must first be converted into the legal form of the other, and only then can they be merged. An MB can be converted into a UAB by following the Law on Companies’ rules on asset valuation and authorised capital. A UAB can be converted into an MB only if all its shareholders are natural persons and there are no more than 10 of them. The conversion must be completed before the merger begins.

Why a direct merger is not possible

Only legal entities of the same legal form can take part in a reorganisation, except where the laws governing particular legal forms provide otherwise (Article 2.98(1) of the Civil Code of the Republic of Lithuania, CK). The Law on Companies repeats this: only companies of the same legal form can take part in a reorganisation (Article 61(3) of the Law on Companies of the Republic of Lithuania, ABĮ).

The Law on Small Partnerships makes no exception either. It allows an MB to be reorganised by the methods of merger and division set out in the Civil Code (Article 27(1) of the Law on Small Partnerships of the Republic of Lithuania, MBĮ), and the terms of reorganisation are drawn up by the management bodies of all small partnerships taking part in the reorganisation (Article 27(2) MBĮ). So an MB can merge only with another MB, and a UAB only with another UAB.

Which entity to convert

Conversion (pertvarkymas) is a change of an entity’s legal form in which the entity in its new form takes over all the rights and obligations of the converted entity (Article 2.104(1) CK). The entity does not end; only its form changes. The law allows both directions, but the conditions differ.

Converting an MB into a UAB. An MB can be converted into a private limited liability company (Article 29(2) MBĮ). This is done under the provisions of the Law on Companies on converting an entity of another legal form into a company (Article 29(8) MBĮ). The decision is taken by the members’ meeting of the MB by a qualified majority, which at the same time adopts the new founding documents (Article 29(3) MBĮ). That majority may not be less than 2/3 of all votes held by the MB’s members (Article 18(1) MBĮ). The assets for which shares are issued are valued by an independent valuer (Article 72(12) ABĮ), and the UAB’s authorised capital must be no less than the statutory minimum (Article 72(15) ABĮ). We describe this route step by step in our article Converting an MB into a UAB in Lithuania.

Converting a UAB into an MB. A private limited liability company can also be converted into a small partnership (Article 72(2) ABĮ). But only a company whose shares are all owned by natural persons, and no more than 10 of them (Article 72(24) ABĮ). An insolvent company cannot be converted at all (Article 72(4) ABĮ). The decision is taken by the general meeting of shareholders (Article 72(5) ABĮ); where there are shares of different classes, each class votes separately. The decision needs a majority of not less than 2/3 of the votes carried by the shares of the shareholders present at the meeting (Article 28(1)(16) ABĮ).

Where the MB is a shareholder of the UAB. Only natural persons can be members of an MB (Article 2(1) MBĮ; Article 7(1) MBĮ). If the MB holds shares in the UAB, the UAB cannot be converted into an MB, because not all its shareholders are natural persons (Article 72(24) ABĮ). That leaves one route: convert the MB into a UAB. If the former MB then holds all the shares of the other UAB and that UAB is merged into it, simplified rules apply: no shares are exchanged and the auditor does not assess the terms (Article 70(1) ABĮ).

In what order

The conversion is completed first. Conversion of an MB is complete from the registration of the founding documents of the new entity in the Register of Legal Entities (Article 29(14) MBĮ). Conversion of a UAB ends in the same way, on registration of the founding documents of the entity in its new legal form (Article 72(26) ABĮ). Until then the entity has the status of an entity being converted (Article 29(6) MBĮ; for a UAB, Article 72(11) ABĮ), but its form has not yet changed. So the terms of reorganisation can be filed with the registrar and announced only after that registration.

If you take the MB route, one more prohibition applies: once a reorganisation of two MBs has begun (from the announcement of the terms), a participating MB can no longer be converted (Article 27(4) MBĮ). In addition, a UAB can take part in a reorganisation only once its authorised capital has been paid up in full (Article 61(2) ABĮ).

What time limits the law sets

The law sets no overall duration for the two procedures. They consist of two stages, each with its own minimum time limits.

First stage: converting the MB into a UAB.

• The valuation report or certificate is filed with the registrar no later than 10 days before the decision (Article 72(14) ABĮ).
• The document confirming the decision is filed with the register no later than the first day of public announcement (Article 29(5) MBĮ).
• The announcement is made three times at intervals of at least 30 days, or once together with written notice to all creditors (Article 29(4) MBĮ).
• The UAB’s articles are registered once its management bodies have been elected, the MB’s balance sheet has been drawn up and the other statutory conditions have been met (Article 29(13) MBĮ).
• Article 2.101(2) CK applies to creditors’ rights on conversion (Article 2.104(4) CK): a creditor can demand termination or early performance and damages if the contract provides for this or there is reason to believe that the conversion will make performance harder, and the additional security it asked for is not given (Article 2.101(2) CK).

First stage, if the UAB is converted into an MB instead. The decision is announced three times at intervals of at least 30 days, or once with written notice to all creditors (Article 72(7) ABĮ). The document confirming the decision is filed with the register no later than the first day of public announcement (Article 72(10) ABĮ). The founding documents in the new form are registered only once the management bodies have been elected and additional security has been given to creditors who demanded it. They lapse if they are not filed with the register within 6 months of the decision (Article 72(25) ABĮ).

Second stage: the merger. Once both entities are UABs, the decision on reorganisation is taken no earlier than 30 days after the registrar announces that it has received the terms (Article 62(2) ABĮ). The terms are announced three times at intervals of at least 30 days, or once no later than 30 days before the meeting with written notice to creditors (Article 65(1) ABĮ). Where both entities are MBs, the announcement rule is similar (Article 27(3) MBĮ), and the decision is taken only after 30 days have passed since the public announcement (Article 27(8) MBĮ). The MB decision cannot be taken until the creditors’ demands made under Article 27(7) MBĮ have been met (Article 28(2) MBĮ). Whether a merger needs the consent of creditors, the bank or employees is covered in our article Company reorganisation: do you need creditor and employee consent?.

So the merger stage cannot take less than 30 days from the announcement, and it begins only once the conversion has been registered. The law sets no duration for the conversion stage. It depends on the chosen form of announcement, on when the valuation is filed with the registrar, and on meeting the conditions of Article 29(13) MBĮ.

More on reorganisation

• Reorganisations and separations of companies: service page
• Converting an MB into a UAB: decision, capital, creditors, timing
• Merger by acquisition in Lithuania: steps, decisions and time limits
• Terms of reorganisation in Lithuania: who drafts them, contents, notice

How to start

Send us the founding documents of both entities and recent extracts from the Centre of Registers (Registrų centras), and tell us who the MB’s members and the UAB’s shareholders are. We will tell you which entity to convert and draw up a schedule for both stages.

Phone +370 5 212 1506, email info@linden.lt

More about this service: Reorganisations and separations of companies.