Koumentakis

Author: skoumentakis

  • Acquiring warrants from the SA

    Acquiring warrants from the SA

    Warrants are an excellent tool for attracting investors and capital to an SA. We approached, among other things, in the context of our related article, issues regarding the issuance of the warrants and the relationship between the issuing SA and their third-party holder. In the direction of the further investigation of this specific institution, we will be concerned, here, with an interesting question: Is it allowed for an SA to become the beneficiary of its own or its parent company’s warrants? And, if so, under what conditions?

     

    Acquisition of Warrants

    The matters related to the original and derivative acquisition of the same warrants are regulated in the law (art. 57 n. 4548/2018) in an application by analogy of the provisions on the, original and derivative, acquisition of own shares by the SA.

    For reasons of protection of the shareholders, the SA and the corporate lenders, it is prohibited (art. 57 §1 paragraph a’) to undertake (primary acquisition) of warrants by the same – upon their issuance. In this way, the future increase of the SA’s share capital with its own participation is avoided (after the exercise, that is, of the options included in the warrants). The taking of warrants by a third party (e.g. a member of the Board of Directors or another), who acts in their own name on behalf of the SA, is also, logically, prohibited.

    It is also prohibited, according to a logical sequence, the pledging of warrants, to secure claims of the SA that it issued itself (art. 57 §1 paragraph a’).

    On the contrary, (art. 57§2) the derivative-secondary acquisition of warrants (e.g. through purchase) by the SA is allowed. The conditions, in this case, are stricter than those concerning the derivative -secondary acquisition of its own shares.

    Finally, the SA is allowed to finance third parties to acquire their own warrants (art. 57 §1 sec. b’). After all, the financial support of third parties often serves the purpose of leveraged buy-outs. A necessary condition, however, is compliance with the conditions for the acquisition of own shares by the SA.

     

    In particular: Derivative Acquisition of Warrants

    Scope, Risks & Purpose

    The acquisition of warrants, in a derivative way, refers to acquisitions (through sale, for example – as already mentioned), carried out by the SA. It also refers to acquisitions, by a third party, who operates in their own name on behalf, however, of the SA (:indirect representative).

    The acquisition of warrants by the SA involves risks. The payment of consideration by the company violates the principle of protection of the share capital. Its cash reserves are used, in this case, for prohibited, in principle, purposes: for the acquisition, i.e. of an option to acquire its own shares (which, as such, the SA is forbidden to undertake).

    At the same time, in this case, the company’s solvency towards its creditors is reduced. And so is its creditworthiness, the value of the investment for the shareholders and the potential interest of prospective investors.

    Despite the obvious risks, however, the acquisition of warrants by the SA is likely to serve its reasonable business and investment interests.

    This same acquisition by the SA may, first of all, be the way to avoid the exercise of the option by the transferor-beneficiary of the warrants. In this case, the SA will not be obliged to increase the share capital and issue new shares in the future.

    However, there is another, also interesting perspective for the SA: the investment perspective. With the same acquisition of the warrants on its part, it is possible to achieve: (a) More effective utilization of the market conditions for the benefit of the latter (:SA) – as it will then be able to redistribute the warrants at a higher price, in new investors. (b) Diversification of the beneficiaries of the warrants – as long as such a choice serves its strategic goals.

    Method of Acquisition

    The acquisition by an SA of the warrants issued by itself cannot, of course, take place unilaterally; on the contrary, the cooperation of the respective beneficiary-holder is a prerequisite. The most common way is to sell and transfer them from the latter (their beneficiary) to the SA. A redemption (“withdrawal”) clause of the warrant purchase agreements in international trading practice, is not, however, rare. Such a clause is placed in the issue contract of the specific warrants and makes them redeemable by the issuer. In this way, an option is formed (of a speculative-profit nature) in favor of the SA. Its exercise is subject to predetermined conditions regarding, in particular, the time of exercise as well as the price of the acquisition.

     

    Derivative Acquisition Conditions

    Cases of transactions involving the derivative acquisition of warrants for consideration (e.g. through sale) are permitted, but stricter prerequisites are provided (compared to those for the acquisition of own shares). And this is because, although it is possible for the proprietary warrants to present an investment interest, the exercise by the company of the options embedded in its own or its parent’s warrants is prohibited (art. 58 § 1 section b’).

    Competence

    The SA’s decision on the acquisition of warrants it issued itself belongs to its Board of Directors – as a collective body. The relevant approval is provided prior to the acquisition and has a specific duration of validity. The authorization of a substitute body is expressly prohibited (art. 57 §2 section a’).

    In its relevant decision, the Board of Directors should justify and link the specific acquisition to the service of the corporate interest (art. 57 §2 paragraphs a’ and b’). In the same decision, the minimum and maximum limits of the acquisition value should also be determined, as they result from the mandatory report of a chartered accountant or accounting firm (art. 57 §3 para. a). The onerous acquisition may not result in the reduction of equity to an amount lower than that prescribed by law (art. 57 §3 para. b and 159§1).

    In the event that there are exceptional financial reasons, the decision to acquire the same shares should be taken by the ordinary GA of the SA.

    The questions regarding the responsibility of the members of the Board of Directors are determined by the rules of diligent management (art. 96 et seq.). Their criminal liability is also not excluded (art. 177 par. 3).

    More Special Terms

    The issuer’s contract with the holder of the warrants (and/or special legislative regulations) may further limit the acquisition of the same warrants. In any case, however, the SA, both during the process of purchase and redemption-withdrawal of the warrants, must observe the principle of equal treatment of their holders (art. 57 § 2 section a’). If the warrants are traded on a regulated market or MTF, the provisions to avoid market abuse must also be observed.

    Universal Transfer of Property Or us a Donation

    Contrary to the limitations and conditions mentioned immediately above regarding the acquisition of warrants for a consideration, the acquisition of the same warrants by the SA in the context of a universal transfer of property (e.g. acquisition by absorption) or for a gratuitous reason (e.g. donation) their observance is not required (art. 57§ 2 section c’).

     

    Consequences of Ownership-Liabilities of the SA

    The same warrants that the SA acquires, even its own, are assets (: securities) of the company. However, the fate of the warrants that the SA will potentially acquire is, as it appears, predetermined (Art. 57 § 4); it must cancel the specific warrants immediately, since with the same acquisition it sought to repay its obligations as an issuer. However, if the SA became the owner of them without payment of consideration, then it has a window of one month to cancel the warrants or reallocate them.

    Companies with listed warrants must inform the investing public about any own acquisition.

    Acquisition of own warrants in violation of the above creates an obligation to transfer them within one year, otherwise the warrants are canceled (art. 57 §5).

     

    We have already established, in the context of our previous article, that the acquisition of warrants is an excellent investment tool. Their utilization, however, requires special attention. Their acquisition, e.g., by the SA that issued them is prohibited to take place at the time of their issuance. On the other hand, and under strict conditions, it is possible for the issuing SA to acquire them at a time subsequent to their issue – by purchasing them, e.g., from their owner. The purposes and interests of the SA that can be served in this case are not negligible! In any case: in order to complete our view of the warrants, we should also approach the way of exercising the option embodied in them to increase the SA’s share capital. About this, however, see in our next article. –

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 13th, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Issuance of Warrants

    Issuance of Warrants

    Among the securities that can be issued by an SA are the warrants. Warrants are a modern financial instrument with an ever-increasing international popularity. They appeared in our country in the context of the recapitalization of Greek banks in the years 2012/2013 and on. Investors were then attracted (with warrants among others) to participate in their capital increases: by providing, i.e., the right to later acquire their shares – at a seemingly preferential price. However, they gained legislative support later – in 2018, with the inclusion of the relevant provisions in the law on SAs. Their history as well as international practice prove this, at least: warrants work in the direction of attracting investors and investment funds to the SA; therefore, there are highly interesting.

     

    Concept-Content

    Warrants are a form of securities, written or intangible, that embody or represent the (conventional) right of their beneficiary (: option) to acquire, with their own declaration alone, other securities – e.g. shares, for a pre-agreed price.

    Warrants require the conclusion of an option agreement. This is the agreement between the beneficiary of the (formative) right and their counterparty, which describes the terms of establishment, exercise and amortization of this right.

    Depending on the counterparty of the beneficiary, the title deeds are divided into:

    (a) covered warrants, when the issuer of the right is a third party,

    (b) corporate (: stock warrants), when the issuer of the right is the SA (art. 56 law 4548/18): through them the power of unilateral intervention and modification of the capital composition of the SA is provided.

    The warrants for the acquisition of shares may be traded on a regulated market or MTF (art. 56 §1 sub. b). Therefore, the (subject to conditions) possibility of parallel trading of warrants and shares on the stock exchange is recognised.

     

    Purpose of Issuance

    It is said (partially jokingly) that the warrants are used as “sweeteners” to attract investors. Those, e.g., who choose to become shareholders of the SA are offered the possibility to acquire, at a future time and at a predetermined price, shares of the SA – even if their true/market/internal/stock price will be, then, significantly higher. To obtain, in other words, high profits.

    Warrants are not only attractive to investors. By issuing them, the promotion of the SA’s corporate objectives is achieved, primarily, through the attraction of funds. They mainly serve business needs, strategic and development goals.

     

    Consequences of Issuance

    The decision to issue the warrants pursues (obviously) benefits for the SA as well. But it also carries (not negligible) risks – especially for existing shareholders. With the issuance of the warrants, their holders are given the possibility to increase the SA’s share capital, at a later point in time, by exercising the rights they grant them. This will mean, as an inevitable consequence, the change (possibly a reversal) of the shareholding relationships and balances of the issuing SA. The existing shareholders will, until the redemption of the relevant right of the holders of the warrants, be in uncertainty as to the occurrence (or not) of the relevant changes as well as their extent – in case they are realized.

    The holders of the warrants until (and if) they exercise the rights deriving from them and acquire (if they acquire) the shares corresponding to them, do not for this reason have the status of a shareholder of the SA nor the related rights from the shareholder relationship (see e.g. participation and voting in the General Assemblies). It should be noted that in the event that they hold shares for another reason, they retain their share rights.

     

    Conditions for Common Issuance

    Competence

    Regular Issuance

    Issues related to the authority to issue warrants are regulated analogically to the corresponding provisions regarding the increase of the SA’s share capital.

    The role of the General Assembly: The decision on the regular issuance of warrants is made by the establishing-extraordinary General Assembly (art. 56 §1 paragraph a’). The GA, therefore, decides on an increased quorum and majority.

    The role of the Board of Directors: In the case of the regular issuance of warrants, the Board of Directors has a suggestive role, but of essential importance: it is the body that will present the reasons and purposes of the issuance, comment on the -reasonable or not- financial terms, submit its judgment on the suitability and appropriateness of the measure. It is not excluded, however, that the Board of Directors will acquire a more active role, as long as it is authorized so by the General Assembly to determine the sale price of the warrants as well as the exercise price of the built-in option – in proportion to the increase in the share capital (art. 25 §2).

    Extraordinary Issuance

    At the same time as the regular issuance of the warrants, their extraordinary issuance is also permitted (art. 56 §2). In this case, a relevant decision of the ordinary General Assembly with a simple quorum and majority or of the Board of Directors is sufficient. However, the analogical application of the provisions for the extraordinary increase of the share capital is required and, of course, the alignment with the relevant statutory provisions (art. 24 §§ 1, 2 and 5).

     

    Approval of (the Class of) Shareholders

    Other categories of shares may exist in the SA, in addition to the common ones (e.g. preference – art. 33 §2). For the legality of the decision to issue the warrants, the prior approval of the General Assembly of any affected category of shareholders is required, provided with an increased quorum and majority (art. 56 §4 and 25 § § 3 & 4).

     

    Publicity And Administrative Approval

    The decision to issue warrants has the characteristics of a conditional share capital increase. Both the issue and its terms are subject to the publicity rules that apply to the increase of the share capital (art. 56 §5) – but not to administrative approval.

     

    Right of Preference of Existing Shareholders

    Compensation for the adverse legal consequences to the detriment of the old shareholders in case of issuing warrants, constitutes the existence in favor of them of a right of preference – analogically to those that apply to the increase of share capital (art. 56 §6 and art. 26).

    Reasonable interests of the company may lead, under certain conditions, to a limitation or even exclusion of the right of pre-emption (art. 56 §6, sec. b’, and art. 27).

     

    Material Terms of Release

    In the decision to issue warrants (no. 56 §3) should, basically, state:

    (a) The time, the method, the possible price of issuing a warrant and the method of its payment. In this context, the extradition on the issuance must define how the issuance is to be covered (: the persons to whom it is addressed). Also, the monetary consideration for acquiring the warrant and the deadline for its payment. At the time of payment of the consideration, an equal, special non- distributable reserve is formed (art. 58). Granting of the warrants without consideration is not excluded. When, in particular, it results from another transactional relationship with the SA (e.g. acquisition of shares).

    (b) The deadline for exercising the rights. This is the amortization period within which it is possible to exercise the beneficiary’s conversion right. A motivation for the acquisition of the warrants is the longest possible amortization period: while this increases their economic value, it acts as a deterrent to the entry of new investors through subsequent increases in share capital.

    (c) The other conditions for exercising the option. The contracting parties, in particular, may associate the exercise of the option with further formalities and consequences.

    (d) The class of shares to be issued. The category of shares, which the beneficiaries will be able to acquire, should fully comply with the statutory provisions regarding the type of shares that the SA can issue (e.g. preference shares) .

    (e) The number of shares to be issued and their nominal value. In this way, the determination of the size of the “potential capital” of the SA is achieved. Also, the determination of the percentage of the beneficiaries’ participation in the capital.

    (f) The value or method of calculating the value of the shares to be paid upon exercise of the right. The specific term refers to the exercise price of the option of the warrants: the price, i.e., that will be paid by the beneficiary of the warrants for the acquisition of the shares based on the option. The price must be fixed and paid in full. Its amount, however, should be at least equal to the nominal value of each share to be issued.

    (g) The number of shares each security gives the right to purchase. This regards the determination of the so-called multiplier, with a key business interest for both the issuer SA and the holder of the security: it is the multiplier that determines the maximum number of shares that the beneficiary of the warrant will acquire if they fully exercise their option. Holding a security usually gives the right to own a share. It is possible, however, to provide a multiplier as a variable size or one less than a unit (<1).

    (h) The adjustment of terms of warrants and rights in case of corporate actions. For the purpose of protecting the rights of the warrants throughout the usually long amortization period of exercising the option, it is possible to provide clauses to (fairly) deal with unexpected (or not) changes.

    (i) Any other relevant detail.

     

    Defective Issuance

    Legal consequences

    In the event of a defect during the issuance of the warrants, the regulations for defective resolutions of the General Assembly and Board of Directors shall apply, respectively (art. 137-139 and 95). Violations cause, as the case may be, invalidity or annulment of the relevant decision. It is possible, in any case, to temporarily suspend the validity of an invalid decision.

    Responsibility of Board Members

    The responsibility of the members of the Board of Directors for actions or omissions, regarding their proposal on the issuance of the warrants, is judged on the basis of the rules of diligent management (art. 96 et seq.). Decisions, however, issued by the Board of Directors without (or in excess of) the authorization of the General Assembly do not generate responsibilities.

     

    Other Issues

    Partial Coverage of Warrants

    In the corporate decision for the issuance of the warrants, it is possible to provide for the possibility of partial coverage – in analogy to what applies in case of partial coverage of a share capital increase (art. 56 §7 and art. 28).

    Nominal warrants

    As is the case with shares, warrants are issued, exclusively, as nominal (art. 56 §8).

    Assessment

    An important feature of the warrants is their paper or intangible character – depending on the relevant statutory provision.

    Beneficiaries of stock purchase certificates vis-à-vis the issuing SA are considered, in principle, those registered in the respective company books – unless it has been contractually defined otherwise (art. 56 §9 & art. 40-43).

    The incorporation of rights in registered warrants has primarily a legitimizing/ declarative function for the holder of the warrants. The importance of their notation is enhanced when they reflect the more specific conditions for exercising the incorporated option.

    Transfer And Encumbrance

    The transfer of warrants is, first of all, permissible, free and non-casual (even if the shares to be acquired are to be earmarked). It is required, in any case, to enter into a contract of transfer and to register the successor (special or universal) in the relevant book. It is, however, possible to block the transfer of the warrants. It is possible (if not expressly excluded) to set up rights in rem on the warrants. It is required that they be notified to the issuer as well as the person entitled to exercise the option to acquire the shares.

     

    The older and more widely known, worldwide, institution of warrants has already proven to be effective in our country as well: in the context of the aforementioned recapitalization of Greek banks. At that time, the funds necessary for their rescue were attracted, despite the fact that the conditions were not ideal or satisfactory. And since, under the extremely unfavorable conditions at the time, it proved to be effective, much more so it proves to be so in other, more favorable circumstances – in the context of the process and effort to attract investors & investment funds to SAs. In this light, their value has increased and their (further) utilization in our country is a given, even in the long run. And even in our SA to. Why not?

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 6th, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Bonds: Convertible, Exchangeable and Profitable

    Bonds: Convertible, Exchangeable and Profitable

    We have already approached the concept and basic principles governing the Bond Loan as well as its issue. Bonds, also, both in their common form and their special (hybrid) categories (incl.: “Perpetual”, “Catastrophe”, “Reduced Coverage”). The possibility, lastly, of the Bond Lenders to capitalize, under conditions, their claims. However, there are some special categories of bonds with special interest: Convertible, Exchangeable and Profitable; this article is about them.

     

    Bond loan categories

    In the law on SAs (law 4548/2018) we find four categories of bond loans – corresponding to the bonds issued under each one. Specifically – those with: (a) common (art. 69), (b) exchangeable (art. 70), (c) convertible (art. 71) and (d) profitable bonds (art. 72). We looked into the common bond loan (with the common, i.e., bonds) in its basic form. It is, moreover, the one most commonly used. It represents a pure form of financing with foreign capital – as long as some hybrid element (referring to capital financing) does not intrude into its terms. The other categories of bond loans, however, constitute forms of intermediate financing. Let’s take that approach too.

     

    Exchangeable bonds

    Basic features

    It is possible (art. 70 §1 Law 4548/2018) to issue a bond loan with exchangeable bonds. The bondholders retain, in this case, the right (option) to request, with their own declaration, the (partial or total) repayment of their bonds, based on what is defined in the loan agreement. This repayment is not carried out in monetary terms but by transferring to them other bonds or shares or other securities of the issuer or third parties.

    A corresponding right of exchange may (also) be reserved in favor of the issuer.

    At the same time, it is possible for the bond loan to stipulate that the exchange becomes mandatory at a certain time or when a certain event occurs. It is also possible for it (the exchange) to depend on some suspensory condition.

    In the event that the issuer SA or a third party grants the right to exchange the (exchangeable) bonds, it is obliged to have and keep in its ownership free from any encumbrance (with the possible exception of ones existing in favor of the bondholders) the underlying bonds, (own) shares or other securities. This obligation extends, at the latest, until the time of payment/repayment of the loan (no pre-emptive right of existing shareholders is therefore established). The issuing SA, alternatively, is obliged to have drawn up a contract, which ensures the possibility of timely delivery, through a third party, of the bonds, shares or other securities in fulfillment of their relative obligation (art. 70 §2).

    The bond loan with exchangeable bonds acquires a hybrid form, in which case the bonds will be exchanged for shares. The bond lender, in this case, will become its shareholder.

    It should, however, be noted that the bond holder acquires shares that exist at the time of the exchange and are not then issued for the first time. On the other hand, the holder of convertible bonds (analyzed below) acquires SA shares that are issued for the first time when the bonds are converted (art. 71).

    The terms of the convertible bond form part of its contract. However, their configuration depends (also) on the securities with which the exchange is imminent. When, e.g., the bondholders are to receive securities that are registered (ind.: shares), then, correspondingly, the exchangeable bonds should also be issued, compulsorily, as registered (art. 59 §5 section a’). When the exchangeable bonds are to be listed on a regulated market, the securities with which they are to be exchanged (incl.: shares) should either already be listed or be listed at the same time as them (art. 6 §7 n. 3371/2005).

    The advantages

    The possibility provided to the bondholder to claim the repayment of their bonds from the SA or (instead) to be request the transfer to them of other, agreed upon securities (incl.: bonds, shares of the SA or of third parties) can function as a means of attracting investors and facilitating the financing of the SA. When, respectively, the specific possibility is provided to the SA, the background is created for the optimal choice on its part (either paying off bonds or exchanging them for the agreed securities).

     

    Convertible bonds

    Basic features

    It is possible, in accordance with what has already been mentioned, to issue a bond loan with convertible bonds (: convertible bonds- article 71 Law 4548/2018). They give the bond lenders the right to return their capital as well as interest. However, they provide, at the same time, the possibility of their (potential or mandatory) conversion into a predetermined number of shares. The bond lender of the issuing SA will then become its shareholder. This feature is also found, as mentioned above, in convertible bonds; however, in the case of the latter, the bond lender acquires existing (and not newly issued) shares of the issuer.

    By converting convertible bonds, new shares are created. The issuance, therefore, of the bond loan will end up as a capitalization of liabilities through an increase in share capital. The amount of the loan that will be converted into capital will also constitute the contribution necessary for the increase.

    Issuance

    The issuance of the convertible bond loan follows the procedure of either the ordinary (Article 71 §1 para. a) or the extraordinary increase (Article 71 §1 para. b) of share capital.

    In case of an ordinary issuance, the General Assembly takes the relevant decision with an increased quorum and majority. Such a decision constitutes an amendment to the statute (article 71). The Board of Directors of the SA is obliged until the end of the next month from the day of the exercise of the conversion right to ascertain the increase and to adjust the article of the statute referred to in the chapter, observing the formalities of publicity (art. 71 par. 4 sub. b).

    In the case of an emergency bond loan issue with convertible bonds, the competent body for making a decision to issue convertible bonds can be either the Board of Directors or the General Assembly – subject to the provisiona of the articles of association and the law.

    The decision on the issuance

    The decision to issue the convertible bond loan by the competent body of the SA must include (71 §2, section b) the time and method of exercising the conversion right, the price or the reason for conversion or their range. Also: the time or period of exercise of the conversion right as well as any denominations that need to be filled. It is also possible to determine the type of exercise of the relevant right or the competent person to whom the relevant exercise of the conversion right should be addressed.

    A potential content of the issuance decision can be “…the way to readjust the price or the conversion ratio, if events occur that may affect the value or marketability of the shares” (art. 71 §2 section b) Law 4548/2018). If there is no relevant provision, the relevant risk (e.g. on a bad business course of the SA) is borne by the respective bond holder.

    The Board of Directors is defined as the competent body for defining the final price or the final adjustment ratio before issuing the loan – even if the Board of Directors determines them precisely.

    Preemptive right

    The existing shareholders have a right of preference in the case of the issuance of bonds with the right to convert into shares (art. 26 §1). However, such a right is expressly excluded at the time of conversion of the bonds into shares (art. 71 §4 in fine). A corresponding right is not reserved, however, to the already existing bond lenders, whether an increase in the SA’s share capital or the issuance of convertible bonds takes place – at least not without a relevant statutory provision.

    The advantages

    The (potential) opportunity given to the bondholder to retain their loan claims or to become a shareholder of the SA, can make the bond loan a means of attracting investors and facilitating the financing of the SA. When, respectively, the specific possibility is provided to the SA, the choice of the optimal option, based on its financial data, is facilitated.

     

    Profitable bonds

    Key features & issuance

    The profitable bonds (participating bonds- article 72 law 4548/2018) have the effect of giving the bond lenders the right to receive either a percentage of the company’s profits (and, in fact, beyond the agreed interest) or another benefit linked to the company’s position.

    The receipt of a percentage of the profits can take place before (and not only after) the minimum dividend is distributed to the (common or preferred) shareholders.

    The competent body for the decision to issue profitable bonds is the General Assembly, which decides by simple quorum and majority. This seems normal, as through the exercise of the right to take a percentage of the profits from the bond lenders a significant influence is exerted on the profits of the shareholders. Thus, the shareholders are the ones who have to decide on a potential realization of such a reduction. Through an application by analogy of the extraordinary capital increase, it is possible to provide authorization to the Board of Directors, in order for the latter to proceed with an ” extraordinary ” issue of profitable bonds.

    The right to receive a percentage of profits is also the element that classifies profitable bonds in intermediate financing. Through them, the bond lenders have claims that directly dependent on the results of the SA. Profitable bonds, despite their differences, are similar to preferred shares (non-voting) which, at the same time, provide the right to receive interest.

    The advantages

    Profitable bonds become attractive to investors as they imply the reduction or elimination of currency risks or reduced return on capital, since in times of profitable corporate years bondholders enjoy an additional investment benefit. At the same time, however, they become attractive for the SA as a lower burden (low interest rate) is achieved due to the additional claims/expectations they provide to the bondholders (: participation in profits).

     

    Convertible, exchangeable and profitable bonds are not the most common in a bond loan. They are, accordingly, not common as a more specialized option for funding of the SA. However, as they offer attractive solutions both for (potential) investors and for the SA itself, they can be a means of attracting investment funds as well as an important alternative for the SA itself: an alternative capable of contributing not only to its survival but also to its development. –

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 30th, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Bond loan

    Bond loan

    We already looked into the securities issued by an SA – as a means of its (external) financing. We also pointed out that the relevant list is, in principle, restrictive (“numerus clausus”). Among the issued securities are the Bonds, in the context of the Bond loan issued – for the exploration of which the present article.

    Bond Loan and Bonds

    The bond loan

    The bond loan (no. 59 to 74 n. 4548/2018) constitutes a basic form of long-term financing of the SA. According to the law (59 §1 ed. a), the loan issued by the SA and divided into bonds. Usually more bonds are issued – but it is possible to issue just one. The amount borrowed, through the bond loan, is divided into equal parts, each of which constitutes the nominal value of the bond in which it is incorporated. Bonds can be either nominal or anonymous (with the exception of those exchangeable into nominal securities or convertible into shares, which are always nominal – art. 59 §5).

    Bonds, in their usual form, offer bondholders an interest rate, which is agreed to be fixed (: straight bonds) or floating (: floating rate bonds).

    Debenture holders constitute a class of lenders of the SA.

    Tangible/ paper and intangible bonds

    The (tangible/ written) bond constitutes a security document (more precisely: debenture) and not just a document confirming or proving the claim of the b debenture holders. The latter (debenture holders) by paying the part of the loan that belongs to them, become, at the same time, the bearer of the corresponding bonds. Upon completion of the expiry time of each bond, the bearer is entitled to present it to the issuing company and the latter is obliged to pay them (:return) the amount stated in the bond.

    Bonds can, however, be intangible. They are mandatorily intangible if they are listed on a regulated market (art. 39 law 2396/1996 and art. 58 §2 law 2533/1997, as replaced by art. 16 law 2954/2001). They are optionally dematerialized or immobilized when such is provided for in the terms of the bond loan (art. 59 §§5 ed. a’ and 6 Law 4548/2018).

    Issuance and terms of the bond loan

    The competent body of the SA for the issuance of the bond loan and the formulation of its terms is the Board of Directors (art. 59 §2 ed.΄ b). It is possible, however, to assign this specific power to the General Assembly by the statute of the SA. Especially, however, with regard to convertible and profitable bonds, the authority to issue them and decide on them always belongs to the General Assembly (art. 71 and 72).

    The issuing SA, through its competent, each time, body, proceeds to freely shape the terms of the bond loan. The law, moreover, provides a wide, relevant leeway (article 69 §5). It is possible to subsequently modify them even with terms less favorable to the bondholders. However, in this case, a decision of the bondholders’ meeting is required, with a majority of two-thirds (2/3) of the nominal value of the bonds; in addition: the consent of the issuer.

    The terms of the bond loan constitute the bond program, which must be made known in advance to the bondholders, in order for them to be able to choose (or not) to enter into it.

    The “forgery” of the bond loan

    A common bond loan is classified, as a method of borrowing, in debt financing. However, a typical example of falsification of its specific categorization is, indicatively, the issuance of hybrid forms of bonds: the above-mentioned exchangeable, convertible and profitable – for which see our article to follow.

    The adulteration of the bond loan as a means of financing through the assumption of debt can, in addition, take place through terms (original or as amended) of the bond loan program.

    Initial terms of the bond loan

    The eternal bonds – perpetual bonds

    Οι αιώνιες ομολογίες-perpetual bonds

    It is possible for the SA to enter into a bond loan – without an express maturity. The SA issues, in this case, “eternal bonds” (perpetual bonds)- of an indefinite, i.e. duration. The SA reserves the right to never pay off the specific bonds or, alternatively, to pay them off at the time of its choice with the payment, in the meantime, of course, of the agreed interest (art. 60 §2 par. b’).

    Through the conclusion of a bond loan with the issue of perpetual bonds, the SA receives capital as financing, which is made available to it for an indefinite period of time: the bond lender cannot claim its return. They perpetual bonds (and therefore their hybrid nature) simulate, in this context, the with financing through equity capital (therefore and, under conditions, they are treated as equity capital in accounting): the long-term disposal of assets for the benefit of the company indicates capital; the inability to claim a refund of the payments made by the bondholders refers to the non-return of the contributions by the shareholders. Bondholders, however, do not become (nor can they be considered as) shareholders of the SA.

    Such a bond loan of indefinite duration cannot be terminated by ordinary termination (by meeting, i.e., a certain deadline and/or the existence of a specific reason): it is not consistent with its nature. However, the right of extraordinary termination (the condition of which, as a rule, is the existence of an important reason) cannot be excluded; moreover, it belongs to a contract of indefinite duration. However, a material reason is required. A reason, ie, the existence of which would render the continuation of the contract intolerable. As material reasons are understood to be those, the existence of which exceeds the ordinary investment risk and are expressly provided for, as a rule, in the bond program.

    Financing through perpetual bonds gathers, as an intermediate form of financing, advantages for the issuer similar to financing with the same means (: expansion of equity capital) as well as to financing with foreign means (: no change in the company’s equity balances and interest discount from its income).

    Correspondingly, however, this specific form of financing also holds advantages for investors. Due to the assumed (high) investment risk and the eternal commitment (and non-return) of their capital, the financial compensation collected by the bond lender (:interest) significantly exceeds, as a rule, the interest attributed to common bonds.

    Catastrophe Bonds

    Among the conditions that may be included in the bond loan is the possibility that the obligation to pay interest or return the capital to the bond lenders is conditional (60 §2 f. c΄). This refers to catastrophe bonds encountered in international practice. Their main content is the non-payment of interest or capital, in cases where a risk occurs (usually a natural disaster) for which there is no insurance coverage.

    Catastrophe bonds also present considerable usefulness. Through them, the issuer covers an (uninsurable) risk while, at the same time, the bondholders rightly expect, precisely for this reason, a higher return.

    Subordinated bonds

    Another interesting category of bonds are the subordinated bonds (art. 60 §2 f. d΄). With their issuance, it is agreed that in case of liquidation or bankruptcy of the issuer, the bond lenders will be satisfied after the remaining creditors of the issuer or after a certain category of creditors. This, in practice, means that their owners are subject to a less favorable satisfaction regime than other corporate lenders – they resemble, therefore, the equity capital. This is why they are referred to as quasi-capital social or quasi-fonds propres or substitute funds.

    The SA benefits from the issuance of subordinated bonds as it offers, through them, greater security to its privileged and common creditors. However, their holder – bond lender – also benefits as they rightfully expect a higher return.

    It should be noted here that the term “junior bonds” is not more accurate than the term “subordinated bonds”. As already mentioned, before their satisfaction, according to the law, either all or a certain category of creditors precede. It is therefore possible to issue subordinated bonds, which will not be satisfied along with the last class/series of creditors (as is the case with last series bonds).

    Conditions on modification of the bond loan

    The debt-equity swap

    The bond lenders may decide on the capitalization of the debt corresponding to their bond loan, if (art. 60 §8 f. d): (a) their meeting decides with a majority of two thirds (2/3) of the bonds and (b) the issuer gives its consent (art. 60 §8 f. d’ Law 4548/2018). The claims on both sides will be amortized; the bondholders will acquire shares of the SA: from creditors of the issuer they will turn into its shareholders.

    The shares that the bond lenders will acquire may be either from the issuer’s own (if any) shares or new ones – derived from an increase in its share capital.

    Debt capitalization and convertible bonds

    The case of dept-equity swap (: ex post agreement between the issuer and the meeting of bondholders to convert debt into capital) should not be confused with the case of convertible bonds (according to Art. 71). The amount initially paid to take over the convertible bonds also corresponds to the amount of the contribution during the conversion. On the contrary, in the case of subsequent capitalization (dept-equity swap), the assumption of the bonds at the time of the issuance of the bond loan does not take place in light of the eventual conversion. In the case of debt-equity swap, the claims of the issuer and the bond lenders are set off on both sides (according to art. 20 §4). In the most correct view, the valuation will be carried out in the way that it would take place, if it was a question of contribution of a claim against a third party (according to Art. 17).

    Other terms of mezzanine financing

    In addition to the agreement on the capitalization of the bond loan, there may be other elements (article 60 §8) on the basis of which one could classify the bond loan as mezzanine financing. Indicative: in cases where the interest rate is set to zero – then the loan also applies to contributions (article 60 §8-point a) as well as the subordinated collateral (article 60 §8-point c), which we already approached above. The freedom of transactions (article 60 §8-f. i’) can work in this specific direction.

     

    The bond loan is differentiated, significantly, in relation to a common loan. Its very flexible content can be adapted to the needs of the SA and also to offer significant benefits to the SA as a source of long-term external financing. However, it is possible to have significant benefits to the lender/holder of the bonds issued in its context. Due to its particularities and the increased, sometimes, assumed investment risk, the bond lender justifiably expects an increased return. Of particular interest, in the context of the bond loan, are the convertible, exchangeable and profitable bonds – for which, however, see our next article.

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 23rd, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Theft, Loss Or Destruction Of The Share Title

    Theft, Loss Or Destruction Of The Share Title

    The concept of the shares is very important. It reflects, according to case law: (a) “…the share of the corporate capital”. Also, (b) “…the right to participate in the company”. Finally, (c) “…the title in which this right is incorporated” (ind. 1227/2011 Multimember Court of First Instance of Athens, 4968/1993 Court of Appeal of Athens, Nomos Legal Database). Regarding the title that the share indicates, we pointed out – among other things – that its issue is not mandatory for the SA. Therefore, if it takes place, it is merely declarative and not constitutive in nature (1227/2011 Multimember Court of First Instance of Athens). But once such a (share) title is issued, what happens in the event of its theft, loss or destruction? What are the provisions of the legislator and what are the possibilities and protection of the shareholder?

     

    Regulation

    The issue of theft, loss or destruction of the share certificate of the SA is regulated in article 55 of Law 4548/2018. This article corresponds to article 12a of the previous law 2190/1920 (see Explanatory Report of law 4548/2018 on art. 55).

    The provision in question refers, specifically, to provisions 843 et seq. Code of Civil Procedure. These are the ones that apply in case of alienation of the shareholder from the share title and the dividend receipts that may not have been separated from it. The stages that must be followed are two: (a) The preparatory document for the invitation to announce share rights (843-849 of the Code of Civil Procedure). (b) That of the main procedure of declaring the share title invalid (850-860 Code of Civil Procedure).

     

    Purpose

    The purpose of the regulation of the law on SAs (Art. 55 Law 4548/2018) is the security of transactions. It seeks, through this, to remove any doubt regarding the identity of the true beneficiary of the share, in case of alienation from them. Also, the prevention of usurpation of the shareholder rights embodied in the share by a non-beneficiary third party.

     

    Conditions of Application

    In order to start the process of declaring the share title invalid, certain conditions must be met:

    (a) Issuance of Securities

    In general

    A necessary (and reasonable) prerequisite is the (non-mandatory) issuance of equity titles (: registered or anonymous shares – with or without dividend receipts or coupons) by the SA. However, intangible shares are not covered by the specific regulations. The latter are kept in accounting form and do not have the characteristics of securities. Therefore, they cannot be stolen, lost or destroyed. Nor, much more, to be subject to the regulation of 850 Code of Civil Procedure. It is noted, in fact, that the certificate for the intangible shares issued by the central securities depository is only of evidentiary value (18 Law 4569/2018).

    Anonymous and Nominal Shares

    We cannot overlook the fact that the law on SAs prohibited the issuance of anonymous shares from 01.01.2020. Therefore, this provision applies to registered shares or to previously issued anonymous shares that were stolen, lost, or destroyed – without being replaced by registered shares in the meantime.

    There has been a problem, in the past, regarding the (non) inclusion of registered shares in the preparatory stage of the invitation to announce rights (art. 843 et seq. of the Code of Civil Procedure). An argument in favor of not subjecting the registered shares to the said procedure is the explicit mention of the true beneficiary in the shareholders book of the SA.

    The relevant concern was reinforced with the enactment of Law 4548/2018. In particular, in the Explanatory Report on article 55 of this law it is stated that “if the company is certain of the identity of the shareholder (which will happen as long as the shares are – indeed registered, as is mandatory from 1.1.2020) it can issue a new title without due process”.

    At the same time, there is also a dispute as to the application of the stage of the main procedure of declaring the title of registered shares as invalid.

    However, it is argued that the procedure of articles 843 et seq. Code of Civil Procedure has, in the end, a practical significance on registered shares. (a) First of all, because the deed of sale of the transfer of these shares is completed – between the old and new shareholder – with their delivery. (b) Also, its importance is established in case of theft, loss or destruction of the spun-off title, as long as this event takes place before the relevant entry in the shareholders’ book. (c) Or if, it is a defective registration.

    (b) Theft, loss or destruction of stock

    Theft: Theft is recognized as per the strict sense of the criminal code (art. 372 of the Criminal Code). Therefore, it does not fall under this misappropriation, which can come under the concept of loss.

    Loss: Loss means any involuntary escape of the share title from the power and jurisdiction of the owner without his direct or indirect will (1625/2013 Single Membered Court of First Instance of Thessaloniki, 3905/1998 Single Membered Court of First Instance of Athens, NOMOS Legal Database).

    Destruction: Destruction means the physical disappearance of the title as well as any alteration of it (e.g. its content or form).

     

    Procedure for Declaring the Share Title Invalid

    Procedure & Jurisdiction

    If the above conditions are met, it is possible to start the two-stage process: (a) invitation to declare a right on the share title and (b) declaring it invalid.

    This is a genuine case of non-contentious procedure. Through this, when the court decision becomes irrevocable, the shareholding relationship will be separated from the title in which it was previously incorporated.

    Competent, in matter and in place, for adjudicating the application of the above two-stage procedure is the District Court of the registered office of the SA, which issued the share certificates (art. 851 § 2 sub. b Code of Civil Procedure).

    Persons With a Justifiable Cause to Initiate the Procedure

    Standing to Bring an Action

    Those who stand to bring an action to initiate the relevant procedure are:

    For registered shares: The person who can exercise a right, deriving from the security/share title (3905/1998 Single Membered Court of First Instance of Athens): the principal, the beneficiary of a usufruct or the secured creditor).

    For anonymous shares: the last bearer of the shares (see presumption of article 1110 section a’ of the Civil Code).

    In case of co-ownership: Each of the co-owners.

    Defendant to the Proceedings

    The relevant application is not required to be directed against a specific person. Besides, the status of a party is acquired after a summons from the court (art. 748 §3 Code of Civil Procedure) or summons (art. 753 Code of Civil Procedure).

    Third Party Proceedings

    Since this is a case of non-contentious procedure it is possible to exercise third party proceedings.

    In support of the claim: The usufructuary or the mortgagee can intervene in favor of the shareholder making the claim and vice versa.

    Against the claim: The actual owner can intervene against the one making the claim. And so can the one who pleads a stronger right to the title than the applicant.

    Preparatory phase

    Invitation for Declaration

    As noted above, the first and preparatory stage is that of submitting an application for an invitation to declare a right (843-849 Code of Civil Procedure). During this stage, it is sought to find the real beneficiary or the one who has a stronger right to the title than that of the applicant.

    For the certain part of the call request, it is necessary to mention the main details of the share certificate (:852 Code of Civil Procedure – e.g. serial number, series, date of issue, type of share, etc.). Any objective inability of the beneficiary to invoke them should be assessed and treated accordingly by the court on the basis of the available data.

    The invitation stage does not apply in case of theft, when the perpetrator is known. In this case, a vindictive action is brought against the latter, which is heard in accordance with the disputed jurisdiction procedure (3905/1998 Single Membered Court of First Instance of Athens).

    However, the main procedure of declaring the title invalid can be developed simultaneously with a claim action (1094 Civil Code) or the action for the seizure of the exercise of possessory rights (987 Civil Code) due to their different objectives.

    Suspensory Effect

    With the submission of the invitation, the declaration process begins. This submission, however, does not suspend the circulation of the title.

    However, while the invitation process continues, the court – ex officio or upon request – “…has the right to prohibit the bearer of the security from any provision, which includes the delivery to them of vouchers and dividend receipts issued after the prohibition.” (859 §1 Code of Civil Procedure). Dividend receipts that have not been separated from the title at the time of alienation are also covered by the prohibition.

    The specific prohibition may also cover any right that each derives from the title (incl.: right of preference, right to vote in a General Assembly).

    The ban can be lifted (also ex officio) by the court (859 §2 Code of Civil Procedure). Both the decision to ban and the decision to withdraw must be published (845 of the Code of Civil Procedure).

    Issue of Decision

    The competent court for adjudicating the summons application is entitled to issue a (non-final) decision to publish the summons announcing any rights on the title. For its publication, the probability is sufficient (853 Code of Civil Procedure).

    This decision sets a deadline for announcing the rights and filing the title with the court registry. This starts from the publication of the invitation and cannot be less than sixty (60) days (845 § 2 Code of Civil Procedure). Exceptionally, the court may specify a shorter deadline for the provision of annuity payments. Also, the decision must specify as a consequence of the omission of the declaration, the loss of validity of the title (854 § 1 Code of Civil Procedure).

    Legal Consequences of Declaration

    As long as notice is given in time (and the title is filed with the court registry), the court informs the applicant without delay (856 Code of Civil Procedure).

    However, the declaration does not make the title holder a party of the court proceedings. In order to become a party, the latter must intervene against the claimant and request the revocation of the non-final decision. Also, to make an appeal.

    On the contrary, if no declaration takes place, the applicant can proceed to submit an application to declare the title invalid. The relevant application must be submitted within thirty (30) days from the expiry of the notice period (847 §1 Code of Civil Procedure).

    Of course, submitting an application to declare the title invalid is also possible if a timely notification has been made. In this case the court may: (a) Suspend the proceedings until the completion of the diagnostic trial regarding the beneficial owner. Or (b) to proceed with the issuance of a final decision declaring the title to be invalid “…subject to the rights of the person who has been declared.” (848 §1 Code of Civil Procedure).

    Main Procedure: Declaring the title invalid

    The second stage of the procedure of articles 843 et seq. Code of Civil Procedure – as already noted – is that of declaring the title invalid (art. 850-860 Code of Civil Procedure). The validity of the application requires proof of theft, loss or destruction of the title. In addition: the existence of a share right in the person of the applicant.

    In order for the Court to issue a decision, certainty (: full judicial conviction) for the existence of the specific conditions is required.

    Issuance of Decision and Legal Consequences

    The judicial decision to declare the title invalid has a transformative effect. It entails, in particular, the separation of the respective shareholding relationship and the accompanying shareholding rights from the title in which they are incorporated. The latter, of course, still exist. However, the share, as a security, is useless.

    After the (irrevocable-858 Code of Civil Procedure) declaration of the title as invalid, the applicant shareholder is entitled to ask the SA for the issuance of a new title (40 §1 Law 4548/2018). Also to exercise their (arising from the title in question) share rights. The same applies to the rights of the usufructuary and the secured creditor.

     

    The issuance of a share title is no longer necessary in order to exercise the rights deriving from it. The relevant statutory provision is sufficient. In the event, however, that a share title is stolen, lost or destroyed, things get complicated. Time and significant costs are required to restore the equity rights associated with the particular title.

    Perhaps, in this context, it is appropriate to ask ourselves (again) the question: is it really necessary to issue share titles?

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 16th, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Holding of Shares in Usufruct

    Holding of Shares in Usufruct

    We have already established that the establishment of a pledge on shares does not concern only the persons involved. It concerns, to a particularly significant extent, the SA itself. The same happens, correspondingly, with shares in usufruct. The regulations of the law on SAs (art. 54 law 4548/2018) are intertwined, here again, with those of the Civil Code and do not just concern us lawyers. It is necessary to take into account, both during the establishment of the usufruct and in the statute of the SA, the individual, often of decisive importance and value, “details”. It is also necessary to define them beforehand…

     

    Regulation

    The possibility of setting up a pledge and usufruct on shares is regulated, explicitly (and uniformly), in article 54 §1 of law 4548/2018. This is a regulation that corresponds in terms of its content to article 30a of the previous law 2190/1920. It is in harmonization with articles 1177 and 1245 of the Civil Code (see in this regard Explanatory Report law 4548/2018 on art. 54).

    Furthermore, article 54 regulates the possibilities surrounding the exercise of the right to vote in cases of usufruct (§2). Also, the corresponding exercise of other, non-property rights (§3).

    With reference to the property rights, for which there is no relevant mention in the regulation in question: these are determined by the law of usufruct (see related Explanatory Report of law 4548/2018 on art. 54).

     

    Usufruct

    Concept & Content

    Usufruct constitutes, according to the law, a “limited right in rem”. It empowers the usufructuary to use and enjoy a foreign claim or chattel while keeping them intact. It also empowers them to enjoy the fruits of the material material thing. Regarding, in particular, the shares (the focus of the present article), as fruits are considered the dividend-beneficiary of which is the usufructuary.

    Recommendation

    The usufruct is established, more commonly, by contract or, more rarely, by adverse possession (1143 Civil Code). During its establishment, its multiple meaning should be taken into account. The participle denotes the title in which it is incorporated—it therefore falls within the meaning of the material thing. However, it simultaneously enshrines the shareholder right; therefore, it also falls under the concept of right. In the creation of a usufruct on a share, the general provisions of the Civil Code, either on the usufruct of a material thing or on the usufruct of a right, are applied, depending on the share on which it is created. Subject, of course, to the absence of a more specific provision.

    In particular, the method of establishing a usufruct on shares is differentiated according to their individual distinctions (: nominal, intangible and anonymous -1074/2016 Multimember Court of First Instance of Athens, 534/2014 Multimember Court of First Instance of Athens, NOMOS Legal Database).

    Regarding registered shares: For the creation of a pledge on registered shares, the provisions of articles 1178 of the Civil Code are applied. That is, the provisions for the usufruct of a right and, in other words, a claim. The establishment of a usufruct requires the agreement of the parties; in addition, delivery of the title to the usufructuary. In addition, however, registration of the usufruct in the shareholders’ book is required to “legalize” the usufructuary and his relative rights vis-à-vis the SA.

    Regarding intangible shares: The creation of a pledge on intangible shares constitutes the creation of a usufruct on a right. Special arrangements apply – the further investigation of which is beyond the scope of the present article.

    Regarding anonymous shares: Given the abolition of anonymous shares (as of 1.1.2020), the relevant mention is of historical value only. In case of usufruct on anonymous shares, the provisions on usufruct in rem (:1176 Civil Code) were applied. Specifically, an agreement of the parties and delivery of the prefecture, without obligation to follow formalities.

    Exercise of Voting Rights of the Shares in Usufruct

    One of the most important questions in case of usufruct shares is related to the exercise of voting rights. Who is entitled to exercise the right to vote at the General Assembly: the holder of the usufruct or the (bare) owner of the shares?

    In case of shares in usufruct, the usufructuary has the right (unless otherwise specified) to participate in the General Assemblies (1177 of the Civil Code) and to vote in them.

    Is a different agreement possible?

    According to the law on SAs (art. 54 §2 paragraph a’): “Unless otherwise agreed, in the case of a usufruct…on shares, the right to vote in the General Assembly is exercised by the usufructuary ” (art. 54 §2 section a’). However, it is important to note that “the articles of association may prohibit an agreement to the contrary” (section b).

    It is therefore possible:

    (a) For the right to participate and vote in the General Assembly to belong to the beneficiary of the usufruct (: either in the absence of a special agreement between the beneficiary of the usufruct and the (bare) owner or in the presence of a corresponding provision in their agreement).

    It should be noted here that this is also the significant difference between the case of the pledge and that of usufruct. Specifically, in the case of usufruct, the right to vote, in the absence of an agreement to the contrary, is not in principle borne by the shareholder (as in the case of a pledge) but by the usufructuary. This regulation is justified, if one takes into account the purpose of the usufruct. That is, the usufructuary’s benefit from the share right itself, in which the usufruct is established.

    The beneficiary’s right to participate and vote in the General Assembly introduces an exception to the principle of the indivisibility of the share. And this, because it leads to the division of most of the rights that derive from the shareholding relationship.

    (b) For the right to participate and vote in the General Assembly to belong to the (bare) owner: It is, however, presupposed that they have a relevant agreement with the beneficiary of the usufruct as well as the absence of a relevant statutory prohibition [although an extra-corporate agreement on voting rights between a usufructuary and (bare) owner]. The specific agreement, however, can take place either at the same time as the establishment of the usufruct or later. It is not required to be submitted to a specific form or publicity. However, especially for registered shares, the (bare) owner is legalized vis-à-vis the SA, as long as the agreement in question is notified to it and the corresponding entry in the shareholders’ book takes place.

    Exercise of Other Non-Property Rights

    Property and non-property (management) rights derive from the shareholding relationship.

    Among the management rights of the shareholder: those regarding the participation and voting in the General Assembly. They are entitled, in the context of these, to be informed about corporate affairs and to control the management of the SA. Minority rights, according to the law, constitute a minimum guarantee.

    The person who has the right to vote (art. 54 §§2 & 3) – in this case the usufructuary or the (bare) owner – is, respectively, entitled to exercise the non-property rigts of the shareholder (see Explanatory Report of law 4548/ 2018 on Article 54, where the following are listed indicatively: the right to appear at the General Assembly, to receive information and to cancel a General Assembly decision).

    Increase in share capital

    A question arises regarding the extension of the usufruct to the new shares in the event of an increase in the share capital. The answer to the question varies depending on the type of increase:

    Upon a nominal increase, the usufruct on the new shares automatically occupies the new shares as well. The latter, moreover, are granted without compensation to the shareholders: the increase in question does not constitute an increase in the SA’s corporate assets but an accounting readjustment of its existing share capital.

    On actual increase, there is an inflow of new assets into the SA (as opposed to the nominal equivalent). Intertwined with the actual increase is the exercise of the pre-emptive right of the shareholders: the (bare) owner is the one, and only them, who is entitled to exercise the pre-emptive right. Therefore, if the (bare) owner of the shares exercises the preemptive right, they are the one who acquire the new shares; however, the usufruct also occupies the specific, new, shares. It is possible, however, for this right to belong to the beneficiary of the usufruct- provided, however, there is a relevant agreement in place.

     

    Obligations & Liability of Beneficiary of the Usufruct

    The right to vote in the General Assembly is not exercised without restrictions when its holder is the beneficiary of the usufruct. The latter must not abuse it. They must also take into account the reasonable interests of the (bare) owner and also the purpose of the establishment of the usufruct (281 & 288 Civil Code).

    In case of violation of the specific obligations of the beneficiary of the usufruct, it is possible to establish (intra-contractual and/or tortious) liability against them.

     

    The establishment of a usufruct on shares does not only provide privileges to the usufructuary. It potentially constitutes a drastic intervention (with multiple/extremely significant consequences) in the operation and balance of the SA but also in the property of the (bare) owner-shareholder. It is necessary, therefore, to take the necessary provisions both within the framework of statutory regulations and during the establishment of the usufruct. The consequences, otherwise, can be potentially very problematic.

    However, the consequences can also be problematic in case of loss or theft of the stock titles. On that, however, see our next article.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 9th, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Pledge on Shares

    Pledge on Shares

    The establishment of a pledge on shares does not (cannot) concern, only, the persons directly involved (: lender, debtor, shareholder/ pledger) but also, in particular, the SA itself. The regulations of the law on SAs (art. 54 n. 4548/2018) are intertwined with those of the Civil Code and do not only concern us lawyers. The relevant contract as well as the statutes of the SA must take into account the individual, often of decisive importance and value, “details” and limit them from the start…

     

    Regulation

    The possibility of setting up a pledge and usufruct on shares is expressly regulated in article 54 §1 of Law 4548/2018. This is a regulation that corresponds in terms of its content to article 30a of the previous law 2190/1920. It is harmonized with articles 1177 and 1245 of the Civil Code (see in this regard Explanatory Report of law 4548/2018 on art. 54).

    Furthermore, article 54 regulates the possibilities surrounding the exercise of the right to vote in cases of pledge (§2). Also, the corresponding exercise of other, non-property rights (§3).

    With reference to the property rights, for which there is no relevant mention in the regulation in question: these are determined by the law of pledge (see in this regard Explanatory Report of law 4548/2018 on art. 54).

     

    Pledge

    Concept & Content

    The pledge constitutes, according to the law, a “limited right in rem” to another’s right or foreign movable asset for the security claim. The specific security is achieved through the preferential satisfaction of the lender when the liquidation (usually through auction) of the object under the pledge (: movable asset or right) takes place.

    The asset on which the pledge is established must be foreign (belonging to someone else)- but in particular amenable to disposal by its owner; therefore, it is not possible to pledge an archaeological object or a share whose transfer is prohibited. It must also be individually determined; therefore, it is not possible to set up a pledge on a group of material things (e.g. on shares – unidentifiable/as a whole).

    The validity of the pledge depends on the validity of the secured claim. The latter is required to be monetary or denominated in money. Also, definite or at least, definable. It is possible, finally, that one person is the debtor of the secured claim and another is the one who grants the pledge.

    Setting up the Pledge

    A condition for the formation of the pledge is (art. 1211 of the Civil Code): (a) The ownership of the pledgee (the one who provides the pledge) over the object or right on which the pledge is created. (b) The agreement between the mortgagor and the lender to create the pledge. (c) Compliance with the necessary constituent form (: notarized document or private document of a certain date). (d) The delivery of the material thing by the principal/ mortgagor to the creditor (or third party – art. 1212 Civil Code).

    Regarding, in particular, the creation of a pledge on a share, its many functions must be taken into account . The share denotes the title in which it is incorporated—it therefore falls within the meaning of the “material thing”. However, it simultaneously enshrines the shareholder right; therefore, it also falls under the concept of a “right”. The general provisions of the Civil Code on the one hand regarding the pledged material thing and on the other hand the pledged right are applied to the creation of a pledge on a share. Subject, of course, to the absence of a more specific provision.

    The method of setting up a pledge on shares differs according to their individual distinctions (: nominal, immaterial and anonymous).

    With regard to registered shares: For the creation of a pledge on registered shares, the provisions for the pledge of rights and also for the pledge of material things are applied. In order to set up a pledge, a written agreement of the parties is required (with a notarized document or a private document of a certain date); in addition, delivery of the title to the pledged creditor (or a third party). Finally, registration of the pledge in the shareholders’ book is required to “legalize” the pledge and the related rights vis-à-vis the SA.

    Regarding intangible shares: The creation of a lien on intangible shares constitutes the creation of a lien on a right. Special arrangements apply – the further investigation of which is beyond the scope of the present article.

    Regarding anonymous shares: Given the abolition of anonymous shares (as of 1.1.2020), the specific case is already of historical value only. In the event of the pledging of anonymous shares, the provisions on the pledge of movable property were applied (: art. 1244, sec. a’ of the Civil Code).

     

    Exercise of Voting Rights While there is a Pledge on Shares

    One of the most important questions in case of pledging of shares is related to the exercise of voting rights. Who is entitled to exercise the right to vote at the General Assembly: the pledged lender or the pledged /owner of the shares?

    In the case of a pledge on shares, the pledger has the right during the pledge (unless otherwise specified) to participate in the General Assemblies (1247 Civil Code) and to vote in them.

    Is a contrary agreement possible?

    According to the law on SAs (art. 54 §2 paragraph a’): “If nothing else has been agreed upon, in the case of…a pledge on shares, the right to vote in the general assemblies is exercised by…the pledger ” (art. 54§ 2 section a’). However, it is important to note that “the articles of association may prohibit a contrary agreement” (section b).

    It is therefore possible for:

    (a) The right to participate and vote in the General assembly to be exercised by the pledger /owner of the shares (: either in the absence of a special agreement between the pledger /owner of the shares and the pledged lender or in the presence of a corresponding provision in their agreement).

    (b) The right to participate and vote in the General Assembly to be exercised by the pledged creditor: It is possible, provided that they have a relevant agreement with the pledgor / owner of the shares as well as the absence of a relevant statutory prohibition (although an extra-corporate voting agreement between a pledged creditor is always possible and pledgee /owner of the pledge). The specific agreement, however, can take place either simultaneously with the conclusion of the pledge agreement or later. It is not required to be submitted to a specific press or publicity. However, especially for registered shares, the pledged creditor becomes legal against the SA, as long as the agreement in question is notified to it and the corresponding entry in the shareholders’ book takes place.

    The agreement, however, which results in the recognition of the right of the secured creditor to participate and vote in the General Assembly, introduces an exception to the principle of the indivisibility of the share. And this, because it leads to the division of most of the rights that derive from the shareholding relationship.

     

    Exercise of Other Non-Property Rights

    Property and non-property (management) rights derive from the shareholding relationship.

    Among the management rights of the shareholder are those of participation and voting in the General Assembly. They are entitled, in the context of these, to be informed about corporate affairs and to control the management of the SA. Minority rights, according to the law, constitute its minimum guarantee.

    The person who has the right to vote (art. 54 §§2 & 3) – in this case the secured creditor or the one holding the pledge – is, respectively, entitled to exercise the non-property, shareholder rights (see Explanatory Report n. 4548/2018 on of Article 54, where the following are listed indicatively: the right to appear at the General Assembly, to receive information and to cancel a General Assembly decision).

     

    Increase in share capital

    A question arises regarding the extension of the pledge to the new shares in the event of an increase in the share capital. The answer to this question is given by theory and jurisprudence (see 1188/2012 Supreme Court, NOMOS Legal Database), depending on the type of each increase:

    Upon a nominal increase, the pledge on the shares automatically applies to the new shares as well. The latter, moreover, are granted without compensation to the shareholders: the increase in question does not constitute an increase in the SA’s corporate assets but an accounting readjustment of its existing share capital.

    Upon an actual increase, there is an inflow of new assets into the SA (as opposed to the nominal equivalent). Intertwined with the actual increase is the exercise of the shareholders’ right of pre-emption: the pledging shareholder is the one, and only they, who is entitled to exercise the right of pre-emption. Therefore, if the pledging shareholder exercises the preemptive right, the pledge extends and occupies (also) the new shares. However, a necessary condition is the relevant agreement in the context of the pledge agreement.

    The pledge on the shares issued following a real or accounting increase is acquired from the time of delivery to the lender of the new shares (: analogous application of art. 1252, sec. b` Civil Code).

     

    Obligations & Liability of the Pledgee

    The right to vote in the General Assembly is not exercised without restrictions when it’s the one holding it is the secured creditor. The latter must not abuse it. They must also take into account the reasonable interests of the pledgor and the bare owner as well as the purpose of setting up the pledge (281 & 288 Civil Code).

    In case of violation of the specific obligations of the pledged creditor, it is possible to establish (intra-contractual and/or tortious) liability against them.

     

    The establishment of a pledge on shares is not only an important security of the pledged lender. It represents, potentially, a drastic intervention (with multiple/extremely significant consequences) in the life and balances of the SA as well as in the property of the pledged shareholder. It is necessary, therefore, to take the necessary provisions both in the context of statutory regulations and when delimiting and drawing up the pledge agreement.

    The consequences, otherwise, can be potentially disastrous. Correspondingly, of course, in the case of the creation of a usufruct on shares. But about this see our next article.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 2nd, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Co-ownership Of Shares Of SA

    Co-ownership Of Shares Of SA

    We have already been concerned, in the context of our previous articles, with the specific participle and its importance. Also with a series of related issues. We were also concerned with the principle of the indivisibility of the share (“…shares are indivisible”). In this context, is co-ownership of shares possible? And, if so, do any issues arise? The present article will explore these (only apparently simple) questions.

     

    Regulation

    The issue of the co-ownership of shares is regulated, for the first time, in the law on SAs (art. 53 law 4548/2018). There was no relevant regulatory provision in the previous law no. 2190/1920. The new provision regulates the relevant issue, approximately as it had already been formulated in practice (see Petition Report on art. 53 law 4548/2018). This is a provision of mandatory law. Its application, therefore, cannot be excluded by means of a (contrary) statutory provision or, much less, an agreement.

     

    Purpose

    The regulation in question aims to legislate the principle of the indivisibility of the share referred to in the introduction (art. 53 § 1). However, it expressly foresees and regulates what is permitted by the society on the shares of the SA, removing any potential doubt (art. 53 §2). It further regulates the relations of most of the beneficiaries of the shares with each other and with the SA itself. It facilitates and protects, respectively, both them and the company.

     

    The Principle Of The Indivisible Character of Shares

    Content

    We have already been concerned with the principle of indivisibility of titles (art. 33 §4)- a more specific manifestation of which the corresponding principle applies on shares (art. 53 §1). The dual content of the latter is analyzed:

    (a) In the prohibition of splitting of the rights and obligations arising from the share (see related Explanatory Report of law 4548/2018 on art. 53).

    The rights deriving from the share (we have already seen how) are divided into: (i) administrative (eg right to vote, representation at the General Assembly) and (ii) property (eg right to participate in profits and to the product of liquidation). However, it is not possible, within the framework of this principle, neither to divide them nor to transfer them to separate persons. Only the (single and total) transfer of the shareholding relationship is possible.

    (b) In the prohibition of division into smaller “sub- shares ” (see related Explanatory Report of law 4548/2018 on art. 53).

    A person acquires the status of shareholder independently for each share that comes into their ownership. The acquisition of a share, respectively, by several persons (e.g. due to inheritance) implies the maintenance of its indivisibility. This means that this share is not divided into (more) sub-shares corresponding to the number of the more than one beneficiaries. However, a social relationship is established between them.

    It should be clarified, here, that the statutory (and always possible) division (: split) of the shares into more is a different matter; provided, of course, that the statutory minimum nominal value of the share is not affected (€0.04 – Art. 35 §1).

    Exceptions

    The establishment of a usufruct and pledge on a share introduces a bending of the principle of indivisibility (art. 54). Both the usufructuary (art. 1177 Civil Code) and the pledgee (art. 1245 Civil Code) are entitled, in principle, to participate in the shareholders’ General Assembly – subject to a different agreement or statutory provision.

    Permissible, exceptionally, (as we have already pointed out) is also the possibility of separate, free transfer of property only rights arising from the title issued by the SA (art. 53§1 & 33 §5 law 4548/ 2018 and 455 of the Civil Code): of the payment claim, e.g., any dividend. Accordingly: the right of preference, the right to the product of the capital reduction or depreciation and the right to the liquidation product (see Memorandum Report of law 4587/2018 on art. 33§5).

    Specific exceptions, however, can be ruled out, resulting in a return to the indivisibility rule. In particular, the law provides that the aforementioned exceptions are subject to the different provision of the articles of association or the terms of issuance of the relevant securities (article 33 §5 in fine).

     

    Co-ownership of Shares

    Concept & Content

    A co-ownership of a share exists in the event that the share belongs to or will fall to more than one beneficiary (natural or legal persons). It is established by deed (eg acquisition of share/shares from several parties – jointly) or created by law (eg inheritance).

    The type of share and the time of incorporation of the company are of no importance whatsoever. It should be noted, however, that the arrangement in question acquires, in practice, value, with the registration of most of the beneficiaries/owners in the shareholders’ book.

    A condition, therefore, for the application of this regulation is the existence of a full right in rem (ownership) over the share. A partnership is not created, therefore, in the event of coexistence on the same share of some limited right in rem of another person (e.g. lien or usufruct). Not even in the case of the existence of several economic beneficiaries on the same share in the context of a debt relationship (eg a dormant partnership).

    As long as there is a co-ownership on shares, they are characterized as “common”. The common shares, as a result of the formation of a company, will be analyzed below. However, the compared term should not be confused with the category of common shares – i.e., those that are issued without having specific, by law, characteristics (such as, e.g., preferred or redeemable shares).

    Management of Co-owned Shares

    The creation of the partnership between the majority of the beneficiaries of the co-owned share or shares implies the direct application of the provisions on the co-ownership (785 et seq. Civil Code).

    As a rule, according to the correct opinion, the collective (and joint) administration by all the co-owners applies (788 §1 Civil Code). The consent of the co-owners is required to carry out serious acts of administration (792 §1 Civil Code).

    Instead, a simple majority vote is sufficient to decide how the common shares are to be regularly managed or held. Also, for carrying out other acts of current administration (789 Civil Code).

    If the shareholders or their majority are unable to make a decision regarding the management of the common shares, the relevant decision can be taken by the court – if one of the shareholders appeals to it. For the relevant lawsuit, the competent court is the Multi-member Court of First Instance, (given the non- monetary subject matter of the lawsuit) which hears according to the regular procedure.

    The court, if necessary, appoints an administrator of the common shares (: Civil Code 790), whose authority it determines. The administrator may be either a co-owner or a third party; they act as the representative of the co-owners.

    For their appointment, the particularities of each co-ownership must be taken into account (correlation of forces, the interest of all co-owners, any particular privileges of shareholders) and obviously the corporate interest.

    In any case, it is also possible to take injunctive measures, following a relevant application to the Single-Member Court of First Instance for the temporary appointment of an administrator (682 et seq. Code of Civil Procedure).

    Designation of a Common Representative

    In the case of an SA, most of the beneficiaries are obliged to indicate to the SA their common representative (art. 53 § 2 sub. a’).

    One or more natural or legal persons (either a co-owner or a third party) are indicated/appointed as a representative. However, the free appointment of a representative is limited in the event that this is provided for by law or, possibly, by contract.

    The suggestion constitutes a multi-person, unilateral addressable declaration of the society of shareholders to the SA. It can be time-limited; it can be freely recalled. Furthermore, it is advisable that both the suggestion and any change thereof (e.g. resignation of a common representative) be entered in the shareholders’ book for reasons of legal certainty.

    After the nomination of a common representative and the relevant declaration to the SA, the common representative has the authority to represent the co-owners (art. 211 et seq. Civil Code).

    Failure to nominate a common representative results in the suspension of the rights deriving from the common shares. Declarations related to the shareholders’ status of the partners can be made, validly, to any of them (art. 53 §2, sec. b΄).

    In the event of a lack of agreement on the nomination of a common representative by the shareholders, the latter may request from the Court the appointment of an administrator – according to article 790 of the Civil Code (art. 53 §2, section c).

    Declarations of Intent to Shareholders

    Declarations related to the common shares (which do not, however, pertain to individual co-owners), can be made, validly, by the SA to the common representative of the shareholders. However, until such a decision is made, any relevant statement by the SA is addressed to any co-owner (art. 53 § 2, sec. b’).

    Distribution of Common Shares

    Each member reserves the right to request the dissolution of the co-ownership at any time (795 Civil Code). In case of co-ownership of several shares, it is possible to carry out their immediate distribution, following a relevant decision of the Court (480 § 2 of the Civil Code). Clearly, provided that it is possible to divide them into parts proportional to the shares of the societies. That is, as long as their value is not reduced (e.g. by the creation of a strong majority and, respectively, insignificant minorities). However, the auction sale (by virtue of the issued court decision) of common shares could not be ruled out: in the case, e.g., where co- ownership of a single share, crucial for the formation of a majority, arose.

     

    Partnership/co-ownership of SA shares is not uncommon. The case of hereditary succession seems to be the most common cause for its creation. Although the co-ownership in question looks, as mentioned in the introduction, simple, it turns out to be quite complex: its individual parameters and aspects can be (positively or negatively) decisive, in some cases, for the interests of the shareholders – of course of the SA as well. But what happens when things get more complex—as in the cases of usufruct and pledge of shares? About them: see our next article.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (September 25th, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Acquisition of Own Shares Through Third Parties

    Acquisition of Own Shares Through Third Parties

    In a series of previous articles we tried to approach issues related to the acquisition of own shares by the SA. We established, there, the impossibility of their original acquisition and the, under conditions, tolerable derivation from this rule. We also dealt with the, in principle, impermissibility of providing credit to third parties by the SA for the acquisition of own shares. But what happens when an attempt is made, through third parties, to circumvent the specific prohibition on acquiring own shares?

     

    Content

    The acquisition of own shares by the SA through third parties is regulated by law (Art. 52 Law 4548/2018). This is a similar regulation to that of article 17 of the previous law 2190/1920.

    The acquisition of own shares by the SA through third parties is, in principle, prohibited. And so is, in this context, (a) the establishment of a pledge to secure claims in favor of the SA on its shares or its parent company (art. 52 §1) and (b) the indirect acquisition of own shares of an SA through a subsidiary of the company (art. 52 §2).

     

    The Lien Prohibition

    Field of application

    In order to prevent the indirect circumvention of the prohibitions mentioned in the introduction, it is prohibited for the SA to undertake its own shares, as well as shares of its parent company (art. 32 law 4308/2018), as collateral to secure loans granted by it or other claims (52 §1). Therefore, the specific prohibition does not cover the shares of other companies connected to the SA (e.g. sister companies).

    The secured claim can derive, according to the letter of the provision, from a loan (article 806 Civil Code); however, in the most correct opinion, from any credit contract. It is therefore necessary for the SA to have, simply, the status of a secured creditor.

    However, the specific prohibition does not cover own shares for which the SA has the status of depositary on the basis of a contract of deposit of own shares.

    It is argued that this prohibition should not extend to the creation of a legal lien. It does, however, include any establishment of a contractual pledge: (a) simultaneous or subsequent to the creation of the secured claim, (b) primary or secondary and (c) in favor of a pledged shareholder as a debtor or as a guarantor of a third-party debtor.

    The prohibition, however, is applied proportionally in the case of establishing a usufruct on own shares of the SA as well as on the fiduciary transfer of their ownership. In fact, in the latter case, all the provisions on pledge are applied.

    Purpose

    The above prohibition seems to be aimed at protecting corporate property. It is clear that the creation of a pledge, without consideration, does not, in itself, imply a reduction of the SA’s assets.

    A risk arises, in fact, to the interests of corporate creditors and existing shareholders in case of non-collection of the secured claim. The SA will not be able to bid in the auction that will follow (as it will not be able to acquire its own shares). Most likely, however, a third party will not be interested in acquiring a minimum, minority, number of shares. And all this to the detriment, obviously, of the SA as any non-liquidation of the pledge will, possibly, make its secured claim uncollectible.

    In addition, financial risks are also avoided in parent-subsidiary company relations (art. 32 of Law 4308/2014), to which the prohibition in question extends. Given, in particular, its administrative dependence, potentially damaging consequences to the detriment of the subsidiary company are prevented.

    Exceptions

    The creation of a pledge to secure loan claims on behalf of credit and financial institutions is excluded from the above prohibition (art. 52 §1 sub. b). The relevant transactions are, after all, part of their usual activity.

    Exceptionally, it is also permitted to pledge shares of the parent company on behalf of the subsidiary company when, exceptionally and under conditions, the acquisition of own shares is permitted (art. 52 §3, sec. b’ and art. 49) – as long as the conditions in question can be met in the case of the pledge [: for excample the acquisition of a lien on shares through universal succession, ind.: merger (49 §4, para. b) ].

    Legal Consequences

    Unlawful Pledge & Liability of Board Members

    The establishment of a pledge in violation of the above prohibition becomes invalid (174 Civil Code). This is absolute nullity. Therefore, this invalidity can be invoked by anyone who proves a legitimate interest. This invalidity does not, in principle, affect the insured claim (e.g. loan agreement).

    The members of the Board of Directors are liable against the company, under certain conditions, for any prohibited creation of a lien on the SA’s own shares and shares of its parent company. They are personally liable for any act or omission. Their liability is, specifically, of a criminal (art. 177§ 3) but also a civil nature – as long as the violation caused damage to the SA (art. 102§ 1).

    Legal Pledge By Exception

    In the case of, exceptionally, a legal pledge (art. 52 § 3a) the provision of art. 50 §1, f. a’ applies (by express reference to art. 52 §4). As a result, the right to represent the pledged shares at the General Assembly is suspended. The right to vote of these shares is also suspended during their retention period – provided that this was previously contractually defined to be exercised by the secured lender. The shares, finally, are not included, in this case, in the formation of a quorum. They must, however, be included in the management report of the Board.

     

    The Acquisition of Shares From a Controlled Company

    The undertaking, acquisition or possession of SA shares by (directly or indirectly), a controlled company, even through an indirect agent, is considered to have been done by the issuer of the SA shares (art. 52 § 2a). Therefore, the acquisition of the above shares is, in principle, prohibited.

    Subjective Scope

    It becomes necessary, in principle, to determine the subjective scope of application of the ban, in terms of companies that are controlled.

    A criterion is, in addition to holding the majority of voting rights, the exercise by the SA of “dominant influence” over the controlled companies. Companies with a parent-subsidiary relationship therefore fall within the scope of the provision (Art. 32 Law 4308/2014). In the same context, the acquisitions from “sub-subsidiary” companies (subsidiaries of a subsidiary) of SA are also included, due to their indirect control and dependence.

    It should be noted here that the controlled company must be capital (: SA, Limited Liability Company, Private Capital Company, Limited Partnership by shares). When, in fact, its registered office is located in a country outside the EU, it is sufficient that its corporate form resembles that of the capital companies listed restrictively in the law (art. 52§2b).

    In addition, any indirect representative of the audited company should be included in the scope of this provision.

    Objective Field of Application

    The equalization, by law, of the acquisition by the dependent/controlled company with the acquisition of shares by the SA itself concerns, in particular:

    (a) in the acquisition by original acquisition (at the time of establishment or at the increase of the share capital) of shares of the dominant/parent company,

    (b) in the acquisition, in a derivative manner, of shares of the dominant/parent company and,

    (c) in the possession/direct control of the shares of the dominant/parent company in the context of e.g. usufruct or power of attorney to exercise the latter’s share rights.

    This regulation also includes the public offering of the subsidiary company for the acquisition of the majority stake of its parent company.

    Purpose

    The immediately above simulation aims, exclusively, to protect the corporate property of the parent company. The (usual) absence of financial and administrative independence of the subsidiary company makes it a ballast to the interests and appetites of the parent company. In this case, this translates into the disposal of the controlled company’s financial resources to acquire shares of the parent company. In a logical sequence: invested, in the subsidiary, capital of the parent/dominant company is spent to acquire its own shares.

    Thus, the following paradox occurs: the parent company pays its own capital – absurd. This way, the principle of the stability of the share capital is violated; the provisions for the acquisition of own shares are circumvented.

    Exceptions

    The above prohibition is not absolute. It should be noted here that acquisitions of parent company shares by a company controlled by it are permissible, in cases where the acquisition of own shares by the SA is permitted according to article 49.

    The presumption, on the basis of which the acquisition of shares by a company controlled by the parent SA is equated with the acquisition of own shares of the SA, does not apply in the following cases (art. 52§5). Specifically, when:

    (a) The controlled company acquires shares, as an indirect agent, on behalf of another person, who is not controlled by the parent SA – consequently, the legal effects of the acquisition accrue to that person.

    (b) The acquisition of the shares is done by another company that professionally carries out operations on securities – subject to the observance of additional conditions arising from the law.

    (c) The acquisition took place while the dependency/control relationship of article 52§2 did not exist between the companies involved. However, the subsequent establishment of the dependency relationship entails the legal consequences of the eventual acquisition of parent company shares, which are analyzed immediately below.

    Legal Consequences

    Acquisition in violation of the above is equivalent to the acquisition of own shares by the SA itself (art. 48 & 49) – depending on its nature as original or derivative. The corresponding consequences follow, as we have already developed in our previous articles. In summary:

    By explicit reference to article 50 §1 f. a’ (art. 52 §4), the rights of representation and voting at the General Assembly are suspended, throughout the period of retention of the acquired shares (according to article 52 §§2, 3). In addition, the said shares are not included in the formation of a quorum.

    On the contrary, the shares legally acquired by the subsidiary are included in the (applicable to the own shares acquired by the SA) limit of 1/10 of the paid-up share capital of the parent company. Finally, they are included in the management report of the parent company’s Board of Directors.

    The liability issues of the members of the Board of Directors are regulated in accordance with what was mentioned above regarding the creation of a pledge.

     

     

    The acquisition of own shares is, first of all – as we have already established – prohibited for the SA. Any attempt to circumvent this prohibition, through third parties or through a pledge, will be ineffective – unless someone moves within the limits of the law (or outside of them). However, we also find exceptions to this specific (prohibitive) rule; logical and, to a large extent, useful exceptions.

    Shares, however, often remain an important asset. And as such, we are sometimes concerned with issues/problems related to respective assets: co-ownership, usufruct, pledge. About them, but also about their management, see our next article.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (September 18th, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

  • Provision of Credit by the SA for the Acquisition of Own Shares

    Provision of Credit by the SA for the Acquisition of Own Shares

    In our previous article, we referred to the issue of the acquisition of own shares by the SA. We established, there, the impossibility of the original acquisition and the cases, under conditions, that a derivation from this rule is permissible. In the present article we will explore an additional, but important, question: is it permitted for the SA to provide credit to third parties for the acquisition of own shares?

     

    Concept & Scope

    The prohibition (because this is what it is about) of the SA granting credit for the acquisition of own shares is regulated in the law (art. 51 law 4548/2018). This is a similar regulation to that of article 16a of the previous law 2190/1920.

    Objective of the scope

    The specific prohibition refers, explicitly, to the financing of third parties by the SA for the purchase of its shares through the granting of – indicatively: (a) advances, (b) loans and (c) the provision of guarantees. These cases, however, are not listed in the law exhaustively.

    The prohibited transactions, on the contrary, include, given the title and purpose of the relevant provision, any other form of credit. Among them, for example, is the conclusion of contracts for the provision of personal guarantees, the opening of credit accounts, etc. (2881/2004 Multimember Court of First Instance of Piraeus–Nomos Legal Database).

    The prohibition also covers financing for the acquisition of already existing shares as well as any newly issued shares, following an increase in the SA’s share capital. Therefore, financing for both the derivative and the original acquisition of SA shares is prohibited (31/2002 Multimember Court of First Instance of Piraeus, 2881/2004 Multimember Court of First Instance of Piraeus–Nomos Legal Database).

    Subjective of the scope

    First of all, it is, of course, forbidden for the SA to proceed with the financing in question to third parties. In addition, however, according to an express legislative provision (art. 51 § 2), it is not possible for subsidiary companies (within the meaning of art. 32 of Law 4308/2014) to make non-permissible advances, loans or guarantees for the acquisition of shares of their parent company by third parties. Neither are general or limited partnerships, in which the partner with unlimited liability is the SA.

    With reference to the concept of “third parties”, this includes, first of all, non-shareholders. Persons, i.e., who wish to acquire, for the first time, shareholder status through their financing. However, the existing shareholders of the SA also fall under this category. The latter, as recipients of the credit in order to increase their corporate participation.

    The members of the Board of Directors of the SA, or of its parent company, are also considered third parties (within the meaning of art. 32 of Law 4308/2014). Also, the surrogate persons who act in the name and on behalf of the aforementioned persons, to whom the financial aid is finally transferred. They are, however, expressly excluded and therefore do not fall under the concept of a third party, the staff of the SA or a company associated with it (art. 51 §4).

    Time of the Funding

    Financing, despite the wording of the law, does not necessarily precede the acquisition. On the contrary, it is equally prohibited, even if carried out after the shares have been acquired. After all, it is imposed by reasons to protect the company’s capital. However, proof of a causal link between the financing and the purchase is required in this case.

     

    Purpose

    The above prohibition clearly aims to protect the principle of the stability of the company’s share capital.

    The assumption, specifically, by the SA of potentially damaging obligations to third parties constitutes an infringement of the guaranty nature of the share capital vis-à-vis corporate creditors and existing shareholders. According to the jurisprudence, the consequence of any conclusion of the prohibited contracts is the disbursement of part of the corporate property; potentially, a prohibited return of capital to the shareholders.

    However, the eventual insolvency-inability of third parties to repay the financing results in a reduction of the SA’s assets. The shaking of the security and the trust of the company’s creditors is, however, a given collateral consequence (1435/2005 Supreme Court, 1046/2006 Court of Appeal of Piraeus, 2881/2004 Multimember Court of First Instance of Piraeus, 31/2002 Multimember Court of First Instance of Piraeus–Nomos Legal Database).

    At the same time, the prohibition of the aforementioned financing also prevents the increase – by unfair means – of the power of the members of the Board of Directors in the SA and, by extension, their majority position in the General Assembly (31/2002 Multimember Court of First Instance of Piraeus, 2881/2004 Multimember Court of First Instance of Piraeus–Nomos Legal Database).

    Despite the above risks, the provision of credits for the acquisition of own shares may serve reasonable corporate interests. Therefore, the necessity to observe a series of (legal) conditions to avoid arbitrariness arises.

    Reasons for the protection of creditors, but also of minority shareholders, require the observance of transparency when carrying out the, exceptionally, permissible financial transactions. The latter facilitate the attraction of new shareholders. In this way, the company’s need to find important investors is often met. Therefore, the shareholder composition is legitimately renewed and the business and financial goals of the company are served. After all, the relevant financed takeovers of companies are not unknown in the business world [: “leveraged buy out” (LBO)].

     

    The (Listed) Prohibited Transactions

    Payment in advance

    Financial transactions prohibited, in principle, include advance payments. The premature, i.e., satisfaction on the part of the SA of any of its non-expired obligations (art. 51 §1, section a’). Also, any advance payment of an amount that constitutes, in essence, a loan for the purpose of acquiring shares.

    However, the acquisition of company shares as a result of legal payments is deemed permissible, for example advance payment of dividends to a beneficial shareholder, by virtue of which they purchase shares as an investment.

    Loan

    The granting of a loan (806 Civil Code) to a third party, by the SA, for the purpose of acquiring its shares, is also a non-permissible transaction, subject to the penalty of invalidity (art. 51 §1, section a’). Any different characterization by the parties becomes irrelevant, when it bears the characteristics of the loan by law.

    Warranty

    The provision of a guarantee by the SA (to, usually, credit institutions) for the granting of loans to a third party, with the aim of the latter acquiring its shares, is also not permitted (art. 51 §1, section a’). The concept of guarantee (art. 847 Civil Code) must be interpreted broadly (1435/2005 Supreme Court – NOMOS Legal Database).

    Therefore, this concept also includes the cases of SA’s guarantee in securities, cumulative debt underwriting or real collateral on the company’s property.

    Dichotomy, however, prevails in theory and jurisprudence regarding the conclusion of guarantee contracts between the SA and third parties. Under the current law regime, it is supported by the theory that any contract of guarantee constitutes a case of refund of contribution. Therefore, articles 22§2 and 159 are directly applied. As far as jurisprudence is concerned, however, it is ruled to be absolutely invalid, i.e. falling within the meaning of the “guarantee” of art. 51 (31/2002 Multimember Court of First Instance of Piraeus, 2881/2004 Multimember Court of First Instance of Piraeus–Nomos Legal Database).

     

    Exemption Conditions

    The (cumulative) fulfillment of a series of conditions is necessary in order to allow an exception to the rule of prohibited financing (51§1). Specifically:

    Reasonable market conditions

    A prerequisite for the validity of the aforementioned financings is, first of all, that they take place under the responsibility of the Board of Directors, with reasonable (:usual in transactional practices in similar cases) purchase terms (art. 51§1, a’).

    Relevant indications are e.g. the level of the expected interest rate, the financial strength of the third parties, the overall security of the company, etc. In the opposite direction are e.g. the granting by the SA of interest-free loans or the provision of collateral without compensation.

    The ascertainment of the solvency of third parties falls within the responsibilities of the members of the Board of Directors, and thus in their duties of due diligence.

    Decision of the General Assembly

    In order for third-party financing to take place for the acquisition of SA shares, a previous decision of the General Assembly is required (art. 51 §1, para. b΄). The relevant decision is taken with an increased quorum and a majority – unless there is a statutory regulation that provides for higher percentages (art. 51 §1, para. b΄, 130 §2 and 132 §2).

    For the granting of a relevant license by the General Assembly, a corresponding notification by the Board of Directors is required. The Board of Directors, in particular, discloses the reasons and essential terms of each transaction and the interest it presents for the SA. Also, the related risks to its liquidity and solvency and the price at which the third party will acquire the shares.

    The obligation to inform the Board of Directors is fulfilled by submitting a written report to the General Assembly, which is submitted to the public (of art. 13). The report must specify, among other things, the manner in which corporate interests are served by the intended financing.

    It may be required to submit to the General Assembly another report of a certified chartered auditor-accountant. This is required when the financial support for the acquisition of SA shares refers to members of the Board of Directors of the SA or its parent company (within the meaning of art. 32 of Law 4308/2014), to its parent company itself or any surrogate persons thereof.

    The above obligation is dictated in order to avoid a conflict of interests. In the case of a co-submission of the said chartered auditor-accountant report, the application of art. 99 is excluded. A typical case, in which the fulfillment of the above-mentioned co-submission obligation is required, is the case of the acquisition of its shares by members of its management financed by the SA buy-out [: management buy-out, (ΜΒΟ)].

    Maintenance of net position

    The last condition for the validity of a transaction from those described above is the maintenance of the net position of the SA (art. 159§1).

    That is, it is required that the financial support of a third party by the SA takes place from its profits and free reserves (art. 51 §1, para. c΄). Otherwise, the relevant financial aid would be equivalent to a reduction of the company’s capital to an amount lower than its share capital and the other non-distributable elements of its net position. It would thus constitute a prohibited refund of contributions.

    In order to comply with this condition, all the financing up to that point is taken into account. In order to further secure, in fact, the corporate property and, of course, the corporate creditors, the provision in the liability part of the balance sheet of a non-distributable reserve equal to the amount of financing from the SA is additionally necessary.

     

    The Credit Institutions. The Staff of SA

    The provision of financing by credit and financial institutions (art. 51 §4) is excluded from the above prohibition. Under the condition, however, that they fall within their “current” transactions and provided that they are conducted according to common transactional conditions.

    Also excluded from these prohibitions is any transaction carried out for the purpose of acquiring shares by or for the staff of the SA or a company affiliated with it. The concept of staff includes any person who provides services to SA (or to a company affiliated with it); regardless of the type of contract between them (e.g. dependent work, services, project).

     

    Illegal Funding: Legal Consequences & Liability of Board Members

    The provision of financial assistance to third parties, in derogation of the provisions of art. 51, implies the absolute invalidity of the transaction in question (art. 51 §1, sec. a΄). The nullity is initial, final and irremediable. It occurs automatically, regardless of fault and knowledge or ignorance of the prohibition by the contracting parties. Possibility of curing of the flaw, in the sense of no. 183 CC, does not exist. This invalidity is examined ex officio by the court. Any waiver of its appeal does not produce legal effects (31/2002 Multimember Court of First Instance of Piraeus, 2881/2004 Multimember Court of First Instance of Piraeus–Nomos Legal Database).

    The provision is void even if the recipient of the provision and the one who eventually became a shareholder of the SA are different.

    Any financial benefit paid by the SA, by virtue of a void promissory note, is sought under the provisions on unjust enrichment (904 et seq. of the Civil Code).

    The members of the Board of Directors are responsible against the company for any prohibited financing to third parties for the purpose of purchasing SA shares. They are personally liable for any act or omission. Their responsibility is, specifically, both criminal (art. 177 §4) and civil, as long as damage was caused to the SA (art. 102 §1).

     

    The provision of credit to third parties by the SA for the acquisition of own shares is, in principle (and rightly so), prohibited. However, as such is possible, under certain conditions, to have beneficial consequences for the SA itself, it is envisaged (and reasonably) that a series of relevant conditions must be fulfilled for the acceptance of their validity. But what happens in cases where attempts are made to bypass the relevant prohibitions through third parties? About this see our next article.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (September 11th, 2022).

     

    Disclaimer: the information provided in this article is not (and is not intended to) constitute legal advice. Legal advice can only be offered by a competent attorney and after the latter takes into consideration all the relevant to your case data that you will provide them with. See here for more details.

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