Court investigation of a legal entity: when is it useful and where should you start?

A court-supervised remedy, not an ordinary audit

Articles 2.124–2.131 of the Lithuanian Civil Code establish a specific civil remedy. Independent experts appointed by the court investigate whether a legal entity, its management bodies or their members have acted properly. Where improper activity is established, the court considers the statutory measures available to restore proper governance. The process is neither an ordinary financial-statement audit nor, in itself, a criminal investigation. [1]

It can be useful where the problem concerns interconnected transactions, payments, use of assets, decision-making and access to information rather than one isolated document. The aim should be to identify and address a particular governance problem, not to obtain an undefined inspection of everything the company has ever done.

When should an investigation be considered?

Potential indicators include repeated unexplained related-party transactions, use of company funds for personal purposes, diversion of business opportunities, conflicts of interest and persistent withholding of material information. These are examples requiring assessment, not a presumption that every related-party transaction or disagreement is unlawful.

Losses, unpaid dividends or disagreement over investment policy do not, on their own, establish improper management. A link is needed between identified conduct, the company’s interests and potential breaches of duty. Where a focused information claim or challenge to one corporate decision would address the issue, it should be compared with the cost and scope of an investigation. The Supreme Court has emphasised that an investigation is not an end in itself: it serves governance oversight and the protection of legitimate interests. [4]

Who can apply?

Article 2.125 defines the persons entitled to apply. For Lithuanian share companies, one or more shareholders whose shares held or managed have an aggregate nominal value of at least one tenth of the share capital may qualify. Several shareholders can meet the threshold together; control of the company is not generally required. [1]

The Code provides form-specific contribution or unit thresholds for partnerships, small partnerships and agricultural or cooperative companies. Other specified groups have separate rules. Entitlement may also arise under constitutive documents or transactions, and a prosecutor may act in the public interest. The entity’s legal form, the applicant’s status and the actual basis of entitlement therefore need to be checked. Being only a creditor or former employee does not automatically confer standing. [1]

Article 2.126(2): the essential first step

A general complaint about management should not simply be transferred into court proceedings. Before filing, the applicant must address the legal entity, its management body or the relevant member, demand that the improper activity cease and allow a reasonable period for the circumstances to be remedied. The request must identify the improper activity or dishonest performance of duties and explain why the conduct is improper. [1]

This is a mandatory pre-action procedure, not merely an optional invitation to negotiate. The Court of Appeal has explained that it gives the recipient a genuine opportunity to remedy the problem voluntarily. Failure to complete it properly can prevent admission or further consideration of the application before the substance of the dispute is decided. [2] [3]

What matters is the content, delivery and opportunity to remedy, not whether the letter is headed “formal notice”. Earlier correspondence, a request to convene a meeting or a demand for accounts will not necessarily meet the requirement. [2]

What should the pre-action request contain?

The addressee and the conduct concerned. Identify whose conduct is challenged: the entity, its director, a management body or a particular member. If both the entity’s and the director’s activities are to be investigated, the request should reach the relevant addressees rather than remain an informal exchange between shareholders.

Specific events and reasons. Set out known transactions, decisions, periods, amounts, information requests or other conduct. Explain the concern: for example, loyalty, a conflict of interest or protection of company assets. The applicant need not pretend that a full expert investigation has already been completed, but assumptions should not be presented as established facts.

An intelligible demand. The recipient must understand what should stop, be corrected or be done. A request for a contract alone may be insufficient where the real complaint is an ongoing undisclosed conflict of interest. The requested steps should fit the circumstances and the recipient’s powers.

A reasonable period and proof of delivery. Article 2.126(2) does not prescribe a universal seven-, fourteen- or thirty-day period. Timing should reflect the scope of the requested action, available documents and the practical ability to remedy the problem. Retain the actual letter, its attachments, delivery evidence and any reply; evidence that an envelope was sent is not a substitute for evidence of its contents. [1] [2]

If the proposed court application later relies on materially different events, reassess whether the earlier request covered them. The pre-action stage should not concern one issue while the application seeks an investigation of an unrelated activity that was never raised with the recipient.

Counsel is required when preparing the request

Article 2.126(3) requires an advocate’s involvement when preparing both the pre-action request and the court application, and representation of the applicant in the proceedings. The Code provides an exception for a prosecutor acting in the public interest. Legal assistance therefore does not begin only at the first hearing. [1]

In case e2-150-464/2017, the Court of Appeal also addressed signatures. An assertion that counsel had advised the applicant was insufficient where the relevant documents were signed only by the applicant. Counsel’s participation, authority and signing of the documents should be properly recorded. [2]

Example: recurring payments to a related company

Suppose a minority shareholder sees recurring payments to a company connected with the director but cannot obtain records explaining the services supplied. “The company is badly managed; please arrange an audit” does not identify a sufficiently clear set of events or the action sought.

A more useful starting point is to assemble the known payments, dates, connections between the parties and earlier information requests. Counsel can then identify the suspected deficiency, explain the reasons and formulate appropriate remedial demands and a deadline. Depending on the evidence, these might concern disclosure of a conflict, explanation of the economic basis of the transactions and cessation of the specified conduct adverse to the company. This is an illustrative situation, not a ready-made notice suitable for every case.

What happens after filing?

The application is filed with the regional court for the legal entity’s registered office. It should substantiate standing, set out the relevant circumstances and show compliance with the pre-action procedure. After hearing the parties, the court decides whether there is reason to believe that the activities may have been improper. [1]

Opening an investigation does not establish misconduct. It is a preliminary decision about whether investigation is justified, not a substitute for the experts’ later work. Equally, an applicant should not seek an unlimited investigation without identified facts. Its period, questions and connection with the suspected management problem should be defined. [4]

Experts: connecting finance, accounting and governance

Court-appointed experts may examine company records, interview the persons specified by law and inspect assets. The court may authorise additional access concerning other entities or state institutions. Carefully framed questions are particularly important where accounting entries, banking transactions, contracts and actual business processes need to be compared. [1]

A private financial review can help prepare the case, but it does not itself replace the statutory court investigation. In case e3K-3-298-611/2020, the Supreme Court emphasised the significance of the expert report: where experts do not establish improper activity, the court cannot independently declare it improper without a supporting expert finding; reasoned disagreement may require the appointment of new experts. [4]

What can the procedure achieve?

Article 2.131 lists governance-related remedies, including setting aside corporate-body decisions, suspending or removing members of management bodies, appointing temporary members, specified interventions in constitutive documents and orders to act or refrain from acting. Liquidation is also listed, subject to additional protections for affected interests; it is not an automatic consequence of an investigation. [1]

The investigation does not automatically award damages or require another shareholder to sell their shares. Those outcomes require assessment of separate grounds and remedies. The strategy should therefore distinguish restoring governance, recovering loss and ending an unworkable ownership relationship.

Preparation and costs

Useful material includes constitutive documents, proof of participation and its size, shareholder agreements, meeting minutes, financial statements, material contracts, payment records and correspondence. A clear chronology is usually more helpful than an unsorted document dump. Documents should be gathered lawfully and facts separated from assumptions.

Costs include legal representation and expert work. Under Article 2.129, the applicant must pay the amount ordered by the court into its account for expert costs; failure to do so can result in the application being left unexamined. The scope of the exercise should be proportionate to the problem and the result sought. [1]

The strongest beginning is a precise connection between the suspected problem, available evidence and a workable demand—not the most aggressive letter. That is why Article 2.126(2) deserves attention at the very start.