Online Formation of Companies in Lithuania in a Comparative Context: Implementation of the Digitalisation Directive and Beyond

 

Virginijus Bitė, Professor of Law at the Law School of Mykolas Romeris University

Ivan Romashchenko, Senior Researcher of the Legal Technology Centre at the Law School of Mykolas Romeris University

Photo credit: Elian, via Wikimedia Commons 

For many years, paper was the main format for the registration of companies. The Digitalisation Directive, adopted in 2019, obliged European Union (EU) Member States to provide founders with the option to form private companies digitally. Although for Lithuania, where online formation of legal entities had already existed even before 2019 and these regulatory developments did not bring about radical change, they nevertheless forced the national legislator to introduce the required amendments. The adopted amendments mostly took effect on 1 July 2022. Among others, the amendments provide for the recognition of identification tools, which means that electronic signatures issued in other EU Member States should be recognised. In addition, the State Enterprise Centre of Registers of the Republic of Lithuania has taken steps to change the registration portal’s interface, to have a guide in English and to simplify the process of registration by allowing foreigners to go without opening bank accounts in Lithuania as a prerequisite to incorporation.

In our research we aimed at studying the provisions of the Digitalisation Directive and the results of its implementation in Lithuania to suggest possible improvements in the online registration of companies. We have carried out a comparative study of both EU jurisdictions (Estonia, Latvia, Lithuania, and Poland) and one non-EU jurisdiction (Ukraine). In addition, a survey was carried out among representatives of large, middle-sized, and small law firms in Lithuania. Additionally, an interview was held with a representative of the State Enterprise Centre of Registers regarding the implementation of the Digitalisation Directive, their experience in registering companies online and future work perspectives. Respective authorities in other jurisdictions, including the Centre of Registers and Information Systems of the Republic of Estonia, the Register of Enterprises of the Republic of Latvia, and the Ministry of Justice of the Republic of Poland, were also approached for statistical information about online registration of limited liability companies.

One of the key provisions of the Digitalisation Directive, the obligation to ensure online formation of private companies, was fulfilled in Lithuania in 2009–2010. To compare, online formation of companies in Estonia has been available since 2007, in Latvia since 2010, and in Poland since 2012. In Ukraine the possibility to create limited liability companies online was officially announced in 2019. The statistical information has shown the increase of companies being established online in all the studied jurisdictions.

As a prerequisite for online formation of private companies in the jurisdictions in focus the template of the articles of association was approved. Estonia, Latvia, and Lithuania use a rather standard template which does not allow many different options of regulation. Meanwhile, in Poland and in Ukraine, templates are designed in a way that the founders may choose among various options. On the one hand, having optional clauses in the model articles of association provides more flexibility to founders—they may choose the clause which fits their needs. On the other hand, if the founders want more sophisticated articles of association, they can go to a notary. It may be argued that in a situation with many options of default provisions founders would be forced to hire lawyers to advise them how one option differs from the other and which is better to choose, entailing more legal expenses. The incorporation process risks becoming even more costly if, instead of default provisions with many options, the model articles of association contain empty fields that the founders would have to fill out. Based on the above, introducing more default provisions for a template of a limited liability company is not an ideal solution fitting all and should be studied more.

Another important aspect we outlined is how the founding documents are to be signed and how easily online registration of companies can be available to foreigners. In general, out of those countries, Estonia has the longest history of application of online registration of companies (since 2007). This jurisdiction has for some time clearly given a way to form companies online to foreigners residing in the EU. In other studied EU jurisdictions, qualified electronic signatures from foreign providers have gradually been recognised. In Poland, there is also one more way to sign the founding documents: through the creation of an ePUAP trusted profile, but this covers only persons having a PESEL number. Therefore, qualified electronic signatures are the main identification tool to form companies online.

In Lithuania several respondents opined in favour of broader usage of e-signatures during online formation of companies, namely the introduction of e-banking. There are some arguments to support said statement. Bank clients who have e-banking are always identified and always undergo a security check with the verification of identification documents. This is why there are grounds to recognise electronic banking as one of the identification tools for the purpose of company formation. Latvian and Ukrainian experience of using Bank ID as an identification tool proves that this instrument is user-friendly and convenient.

Despite a considerably high level of implementation of the Digitalisation Directive in Lithuania, there are still issues in online formation of companies in Lithuania which were reported by respondents. Some of the outlined issues have already been tackled or should be resolved by the implementation of the Digitalisation Directive, namely the recognition of identification means issued in other EU Member States to empower foreigners and the publishing of constituent documents in a language broadly understood by most cross-border users. At the same time, some steps urged by respondents exceed the requirements of the Digitalisation Directive. Those are both technical and legal measures. As for purely technical issues, many respondents pointed at the apparently excessive need to have several documents signed with e-signatures instead of signing one single file. The recognition of e-banking as an identification tool and more flexibility in the signing of a template of a constituent document for a limited liability company would make online formation of companies more accessible to a broader range of people. These suggestions essentially go beyond the effect of the Digitalisation Directive but are aimed at the improvement of the existing regulation of company formation.

 

For more information see: Bitė, V., Romashchenko, I. Online Formation of Companies in Lithuania in a Comparative Context: Implementation of the Digitalisation Directive and Beyond. Eur Bus Org Law Rev (2023). https://doi.org/10.1007/s40804-023-00282-6.

The Concept of a Virtual Registered Office for EU Law

 

Virginijus Bitė, Professor of Law at the Law School of Mykolas Romeris University

Ivan Romashchenko, Senior Researcher of the Legal Technology Centre at the Law School of Mykolas Romeris University

Photo credit: EmDee, via Wikimedia Commons

On 29th of March 2023 the European Commission published a Proposal for a Directive within the initiative devoted to upgrading digital company law. It mostly focuses on the increased transparency and access to information as well as cross-border use of company data. These goals were earlier mentioned in the inception impact assessment report published on 20th of July 2021. However, the inception impact assessment included one more policy option that was omitted in the Proposal: making the EU company law rules and procedures fit for digital age. Virtual registered office (VRO), surprisingly, has not been given green light due to mixed feedback from stakeholders.

Before the European Commission mentioned VRO in the documents, there was an attempt in Lithuania to stipulate this concept at the national level. The draft law on the introduction of a VRO was submitted to the Lithuanian parliament, the Seimas, in 2018. Although the Seimas in general supported the idea, the provisions on VRO have not yet been adopted.

Despite the lack of regulation at the EU and national levels and the apparent lack of academic consideration of VROs, researchers and practitioners have displayed enthusiasm concerning the opportunities that the introduction of VRO might provide. According to the 2017 report by Adelė Jaškūnaitė and Raminta Olbutaitė, prepared within the ‘Create Lithuania’ programme, even in the absence of a legal framework on VROs, Lithuania possessed the technical resources necessary to ensure communication with public institutions as a basis for the establishment of VRO. They concluded that there was a need to replace the physical address with a virtual one since a physical address, as an official registered office, had not fulfilled its purposes effectively. Legal entities had often been registered at so-called ‘mass addresses’, with some addresses serving as the registered offices of hundreds of companies. If VRO were to be introduced properly, this idea would reduce the financial burden on both public authorities and companies. The introduction of VRO would neither impact the corporate governance negatively as most communication among stakeholders in a company has been happening digitally. Inspired by the editorial of Lina Mikalonienė, in our recent research we have delved into the concept of a VRO and tried to evaluate the proper way it might be introduced.

For a VRO to replace registered office, it should be able to achieve the same functions as the registered office does: to ensure that the applicable law and jurisdiction are determined with respect to the legal person, and to ensure proper communication between a legal entity and its counterparties.

As far as the first function is concerned, there are reasons to conclude that applicable law and jurisdiction can be determined without knowing the exact physical location of a legal entity: information about the country where the entity is located should suffice. The VRO would be perfectly able to cope with the function of ensuring a connection between a legal entity and applicable law, even if we only knew the country that the legal entity came from. In that case, national law would be assigned the task of connecting the entity with the proper local laws and regulations, as well as the relevant local authorities. For instance, as far as Lithuania is concerned, a legal entity might have a VRO with a link to Vilnius and its city authorities.

Regarding the second function, it should primarily be noted that the existing regulation needs change. Such change needs to move in the direction of wider digitalisation, so that legal entities can act through a VRO instead of a physical address. While moving in this direction care should be taken not to forget about weaker parties, including consumers, some of which might be forced to communicate by regular mail due to poor digital skills or the absence of access to electronic tools. In addition, it is possible that some foreign state authorities might be prohibited to use such electronic system and be allowed to use only regular mail or services of clerks. Therefore, a link to a physical address to establish communication between a legal entity and its counterparties seems temporarily practical for the transition period till all players and society adapt to the system of e-communication and accept it more easily.

For these reasons, it is recommended that the EU interferes in this sphere by removing any misunderstandings and defining a registered office as including both a physical address and a VRO. EU intervention should also stipulate requirements for organisations that provide VRO in Member States, as well as setting out a legal basis for selecting a virtual address instead of a physical one and for the communication of domestic and foreign actors through VRO. These new rules need to contain safeguards against fraudulent practices, for this all legal entities using VRO should temporarily maintain a link to a physical address – for instance, the address of the director or another contact person. The suggested connection to a physical address should be viewed as a transitional compromise on a path to full VRO and the gradual development of improved virtual cross-border communication being the future replacement of the traditional registered office with its virtual counterpart.

 

For more information see: Bitė, V. and Romashchenko, I., 2023. The Concept of a Virtual Registered Office in EU Law: Challenges and Opportunities.  Utrecht Journal of International and European Law,  38(1), p.25–38.DOI: https://doi.org/10.5334/ujiel.605