Category: Articles

In a previous article we dealt with the concept and distinctions of equity capital. But for its implementation we need planning, preparation and, of course, a “road map”. It is precisely these that will concern us here, together with the techniques and conditions of reduction. The rights and protection of lenders will be the subject of our next article.

Equity Reduction Techniques

The legislator does not detail specific reduction techniques. The theory is called upon to cover the relevant gap; there are three alternatives. Specifically:

Reduction of the Nominal Value of Shares

It is this particular technique that ensures, more than any other, the principle of equal treatment of shareholders. Through this, the nominal value of the shares (either in total or of a certain category) is reduced. The nominal value, however – after the reduction, cannot fall short of the, according to law, minimum of €0.04 (art. 35 §1 law 4548/2018). Any need for further reduction should be met by some other technique (from the remaining two).

Cancellation of Shares

The cancellation of shares naturally results in a reduction of their total number. Its direct consequence is the depreciation of the share rights, which derive from the canceled shares.

The cancellation of shares must, in principle, be done uniformly and proportionally – for all shareholders. Possible unilateral cancellation requires: either a statutory provision (initial or resulting from a unanimous decision of the shareholders) or the consent of those affected. In any case, cancellation of shares takes place in cases of mandatory reduction .

Consolidation of Shares

The technique of combining shares is, essentially, a combination of the immediately preceding methods of reduction. Based on this, certain shares are cancelled. The nominal value of the balances changes, at the same time – and with a specific ratio.

Capital Reduction Conditions & Procedure

Given the importance of share capital, we have already pointed out that its amount, coverage , payment as well as its maintenance at specific levels are governed by specific rules. In order to prevent them from being circumvented, the reduction process requires strict rules and conditions; about them, see immediately below.

Competent body

The decision to reduce the share capital is the responsibility of the General Assembly (art. 117 §1 para. a’ Law 4548/2018), which decides with an increased quorum and majority (art. 29 §1, 130 §3 and 132 §2 Law 4548/2018). It is, however, possible for the statute to provide for greater percentages of quorum and majority – even unanimity (art. 130 §5 and 132 §3 Law 4548/2018).

Unanimity, however, is required – as we have pointed out in our previous article, in the case of uneven reduction. The non-proportional, i.e. non-equal for the shareholders, reduction of the share capital (167/2012 Legal Council of the State).

However, some cases of reduction do not require the above, increased, percentages of the General Assembly for taking the relevant decisions. The decision on the reduction is taken by the ordinary General Assembly (art. 29 §1 and 130 §3 Law 4548/2018), by simple quorum and majority, in cases of mandatory reduction; specifically:

(a) In the case of the cancellation of shares that were not repaid – after the fruitless attempt of the SA to sell them (art. 21 §§5 & 6 and 20 §9 of Law 4548/2018 – see also our previous article).

(b) In the case of the cancellation of the company’s own shares – if it was not possible to sell them (§§6 & 7 of article 49 of Law 4548/2018).

The Invitation to Convene the General Assembly

Content

With the exception of the cases of taking a decision by an unsolicited & universal General Assembly or the signing of minutes without a meeting (art. 135 of Law 4548/2018), an invitation of the General Assembly is required. The specific invitation must define, at a minimum, the purpose of the reduction and the method of its implementation (Article 29 §3 Law 4548/2018). A special mention should be made, in the event that a share capital reduction in kind is to take place.

Purpose

The minimum, by law, content of the invitation serves a dual purpose.

It aims, on the one hand , to inform and not surprise the shareholders, in view of the holding of the General Assembly that will decide on the reduction. The shareholders, receiving the relevant information, can consult and prepare more fully, in order to exercise their right to vote.

It aims, on the other hand, to inform the lenders of the SA (and its potential contractors) in order to proceed (or not) to exercise their legal rights (art. 30 law 4548/2018- for which see our next article).

Legal consequences of violation

The possible failure to mention (or incorrect mention) in the invitation of the elements provided for by the law had the consequence, under the previous law, of the invalidity of the reduction of the share capital.

On the contrary, as the Explanatory Report on article 29 of Law 4548/2018 points out “…the phrase…under penalty of invalidity was deleted”. Today, therefore, any omission or misstatement of information on the invitation (or on the decision) is judged on the basis of “…the general rules on defective decisions of the General Assembly”.

The Content of the Decision of the General Assembly on Reduction

Purpose of Reduction and Method of Implementation

The decision of the General Assembly on the reduction of the share capital, as well as the invitation, must at least mention the purpose of the specific reduction and the method of its implementation (art. 29 §3 Law 4548/2018). The General Assembly may, however, decide otherwise as to the manner of reduction.

Capital Reduction In Kind

As we mentioned in our previous article, a special way of reduction is the reduction of share capital made by payment in kind. In this case, the decision of the General Assembly must accurately describe the assets that will go to each of the shareholders, to avoid any kind of doubt regarding the distribution (art. 31 §1 law 4548/2018).

Amendment of Articles of Association

The reduction of the SA’s share capital requires an amendment of the relevant provision of its articles of association by the General Assembly (29 §4 Law 4548/2018). In particular, the General Assembly must decide on the modification of the amount of the share capital, as it is formed after the reduction. At the same time, and depending on the technique adopted, the modification of the nominal value of the shares and/or the modification of their number. The specific amendment of the articles of association requires the approval of the Management (art. 9 Law 4548/2018).

Minimum Reduction Limit of the Share Capital

The General Assembly cannot, in principle, decide to reduce the SA’s share capital, so that it falls short of the minimum limit of €25,000 (art. 15 §2 Law 4548/2018). However, it can also be decided to make it (even) zero, as long as it is simultaneously decided and, subsequently, implemented to increase the share capital up to, at least, the minimum legal amount.

However, it is possible, as an alternative, to make a decision to simultaneously convert the SA into another corporate type, which by definition will require less or no capital (article 29 §2, section a’ of Law 4548/2018).

Means of “Blocking out” Shareholders(?)

The decision to reduce the share capital to zero can act as a means of removing existing shareholders. Restraint in the relevant event is the right of preference in the upcoming, necessary, increase. Specifically, the law provides that in this increase “…the company’s shareholders have a right of preference according to their participation in the capital, as it was formed before the reduction.” (art. 29 §2, ed. b’ of Law 4548/2018). Despite the doubts regarding the previous regime, the Explanatory Report on article 29 states that: “…it is clarified that in case of a reduction of the capital with a simultaneous decision to increase it, the pre-emptive right of the old shareholders is not removed, even in the case that after the reduction the participation in the capital may have been zeroed out”. There is always, of course, the possibility, under certain conditions, of excluding the right of pre-emption, in this specific increase as well…

Approval of More Classes of Shareholders

Various categories of shareholders may participate in the SA’s share capital (e.g. preferred shareholders, holders of redeemable shares). The decision of the General Assembly to reduce the share capital may affect, directly or indirectly, the rights of one or more categories. In this case, the approval of the affected shareholders is foreseen as a condition for the progress of the relevant procedure. This approval is provided by a decision of the shareholders of the affected category, taken in a special meeting with an increased quorum and majority (art. 29 §6 Law 4548/2018).

The General Assembly of the particular category (or possibly more categories) of shareholders only decides whether or not to grant the required approval. It does not decide on the individual conditions of the reduction, which have already been determined by the shareholders of the SA. Regarding the procedure for convening the special General Assembly, the relevant provisions for the General Assembly of Shareholders are applied accordingly (art. 29 §6 Law 4548/2018).

Publicity of the Reduction Decision

The decision to reduce the share capital is, as we pointed out, of particular importance both for the SA and its shareholders, but also for the SA’s lenders and business partners. Necessary, therefore, is its publicity. It takes place, given its nature as an amendment to the statute, on the website of the Business Registry, after approval by the Administration (art. 12 of Law 4548/2018). Furthermore, the law requires that the relevant decision “…be also posted on the company’s website” (art. 29 §4 in fine n. 4548/2018).

Matters connected with the reduction of share capital seem, indeed, “dry” technically and, of course, tedious. They prove, however, to be particularly important to the company, its lenders, and its shareholders—so much so that they may lead to a “blocking out” of the company of some of them. Solutions exist to protect those involved. But especially with regard to the company’s lenders, see our next article.-

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 15th, 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.

The distinctions of the various forms of reduction of the share capital of the SA seem unnecessarily technical. And so do the issues, in general, related to the reduction of the share capital. They are, however – and as a whole, important as they provide solutions to in other ways unsolvable (or even intractable) problems. We have, repeatedly, referred to the special importance of share capital in the existence and development of SAs in the context of our previous articles. Given its importance, its amount, coverage and payment as well as its keeping at specific levels are governed, as we have seen, by specific rules. Their circumvention (through the reduction of the share capital) could only take place with specific, correspondingly strict, rules (articles 29-31 of Law 4548/2018). These rules and, in general, the concept of share capital reduction, its procedure and conditions as well as its legal consequences are some of the issues that will concern us in the present, but also in our articles to follow.

Share Capital Reduction Distinctions

The reduction of share capital, depending on the purpose it pursues and the way in which it is implemented, is distinguished as follows:

Actual & Nominal Reduction

The distinction between real and nominal reduction is characteristic of the corresponding increase in share capital (about which our previous article ). Particularly:

Actual Reduction

Actual reduction takes place by returning corporate property (more commonly: money) to shareholders. Or also, after the shareholders’ partial or total exemption from the obligation to pay capital. Always, of course, under the condition of observing the conditions of the law.

The actual reduction therefore constitutes a release of capital. It may be aimed at: (a) readjusting the capital to the real needs of the SA, (b) changing the correlation of forces and balances between its shareholders, (c) distributing property of the SA (instead of a dividend for tax purposes) to the shareholders of (or, as the case may be, to a specific shareholder thereof), (d) to increase the profitability of the equity capital of the SA.

Nominal Reduction

A nominal reduction, on the other hand, means the accounting reduction of the SA’s share capital. In other words, the share capital through the nominal reduction is reduced as accounting aggregates, but no payment to the shareholders follows. In other words, there is no real reduction in corporate assets.

The need for a nominal reduction is dictated, in practice, in cases of existence of damages – not, however, temporary and limited. In these cases, the nominal/accounting reduction aims at the consolidation of the SA, the readjustment of the share capital to the (corresponding) reduced corporate property and the satisfaction, in the end, of the interests of the shareholders as well as of the legal entity itself. In fact, if such a reduction is combined with a (simultaneous) increase in the SA’s share capital, it is, as a rule, a move to consolidate it.

Optional & Mandatory Reduction

The decision to reduce the SA’s share capital can be either optional or mandatory.

Optional Reduction

The decision on the reduction and its amount constitutes, in this particular case, a business decision. It is taken freely by the competent corporate body, which evaluates the individual data as well as the, in general, needs of the business.

Mandatory Reduction

In some cases, however, the company’s recourse to the reduction of the share capital becomes mandatory – even by law. Such cases, e.g., constitute:

(a) the case of the cancellation of the company’s own shares, since it was not possible for it to sell the share buybacks (§§6 & 7 of article 49 of Law 4548/2018).

(b) the case of the cancellation of shares that were not repaid – after the fruitless attempt of the SA to sell of them (articles 20 §9 and 21 §§6 & 7 of Law 4548/2018 (see also our previous article).

Uniform & Uneven Reduction

The distinction between uniform and uneven reduction is considered important for reasons of expediency and whether or not to maintain the equity relationships within the SA.

Uniform Reduction

In principle, the reduction of share capital should comply with the principle of equal treatment of shareholders. This means that the participation of each shareholder in the capital should, in such a case, be reduced proportionally. The uniform, consequently, reduction serves not only the principle of equal treatment but also the maintenance of the existing equity balances within the SA.

Uneven Reduction

On the other hand, in the case of the uneven reduction, the relevant decision may lead, in essence, to the return of funds (and/or a specific asset of the SA) to a single shareholder; even to the exit from the SA of one, and only one, shareholder. In other words: in the non-proportional (and non-equal for shareholders) reduction of the share capital.

However, it is argued (and rightly so) that a condition for such an uneven reduction (for the benefit of specific shareholders only) is the unanimous, relevant decision of the General Assembly (167/2012 Legal Council of the State).

Reduction By Payment Of Cash & Capital Reduction In Kind

The actual reduction of share capital, the return, i.e., of corporate property to shareholders, is further distinguished based on the type of property returned.

Reduction With Cash Payment

In this case (which is also the most common one) the capital reduction takes place by paying cash to the shareholders.

Capital Reduction In Kind

The actual reduction of the share capital can also be realized through a direct return to the shareholders of corporate property in kind. In fact, Law 4548/2018-in contrast to the previous regime, regulates the relevant case.

This is one of the two special ways of reducing share capital (Article 31 of Law 4548/2018), as they are analyzed immediately below. More specifically: (a) the reduction by payment in kind (§1) and (b) the reduction for the purpose of forming a special reserve (§2).

Special Ways of Reducing Share Capital

Reduction By Payment In Kind

The reduction of the share capital, with a payment in kind, can prove to be particularly beneficial not only for the beneficial shareholders but for the SA itself. Especially in cases where a large part of its assets are e.g. products, real estate, shares of other companies. In such cases, the liquidation of the assets and the reduction of the capital by payment in cash could prove not only difficult but also harmful to the SA.

The previous regime

The possibility of reduction by payment in kind was not specifically regulated under the previous regime. Objections regarding the permissibility of such a reduction were therefore raised by a portion of the legal theory.

The opposite position was, however, of course also supported. That is to say that “…the reduction of the share capital of an SA by payment in kind to its shareholders, although it is not expressly provided for in the statutory law of SAs (law. 2190/1920), can be chosen, under conditions, by the competent corporate body based primarily on the interest of the company’s creditors and secondarily of its shareholders…” (167/2012 Legal Council of the State -by majority).

The current regime

Under the current regime, any dispute regarding the permissibility of capital reduction by payment in kind is waived. Now, as underlined in the Explanatory Report of the law on SAs (: on article 31 of law 4548/2018), “the possibility of reducing capital in kind is expressly provided for…”.

However, a valuation of the assets to be returned to shareholders due to the reduction is required beforehand. Therefore, the provisions for the valuation of contributions in kind apply (: articles 17 and 18 of Law 4548/2018). At the same time, it is expressly provided that – apart from the exceptions of Article 18 of Law 4548/2018 – “…valuation of the contributions in kind is not required, if the shareholders unanimously decide on the way to implement the reduction” (Article 31 §1, Section c).

Reduction for the Purpose of the Formation of a Special Reserve

The other special way of reducing the share capital concerns the reduction for the purpose of forming a special reserve. Under the previous regime, doubts had been expressed about the permissibility of the relevant reduction method. Whereas, a relevant legislative provision was provided only for listed SAs.

Law 4548/2018 also expressly regulated the specific method of reduction. According to the legislative provision, however, the “special reserve can only be used for the purpose of its recapitalization or its offsetting to amortize losses of the company” (Article 31 §2 in fine). This means that this special reserve cannot be distributed to shareholders. On the contrary, it increases the share capital (according to §1 of article 159 of Law 4548/2018).

As mentioned in the introduction, the ways of reducing the share capital and the related distinctions seem unnecessarily technical. It is, however, particularly important to know them as they often provide us with solutions to intractable, otherwise, absolutely tangible, problems. The (legal) transfer of property from the SA to its shareholders, the reduction of the shareholding (and/or financial support) of some of them, the consolidation of the company, are some of those problems that are successfully managed by the reduction of the share capital. For the comprehensive approach to the specific subject one should talk about the techniques, the conditions and the reduction process. Also for the protection of creditors and the consequences of the reduction. And why not for depreciation purposes as well. But about them, see our next article.

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 8th, 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.

In a previous article we approached the issues related to the increase of the SA’s share capital. There, we were given the opportunity to ascertain the importance of the increase in its funding and, by extension, the achievement of its statutory objectives. However, as obvious as its advantages are, the associated risks are equally obvious; especially with regard to old shareholders (indicative: from the disruption of shareholder balances, unwanted changes in management, and even, in some extreme cases, the violent exit of minority shareholders from SA etc.). The specific (and not only) risks are attempted to be tamed (or even adequately managed) by the legislator through the right of pre-emption.

Concept & Right Holders

The meaning of the right of pre-emption is defined by the law itself: “In every case of capital increase, which is not done by a contribution in kind, as well as in case of issuance of bonds with the right to convert into shares, a right of pre-emption is granted to the entire new capital or the bond loan, in favor of the existing shareholders at the time of issue, according to their participation in the existing capital” (article 26§1 law 4548/18).

This specific right is entitled to be exercised by every shareholder, who has the specific status at the time of the decision to increase the share capital. They are given, through this, the option to be provided with new shares, issued due to the increase (or issuance of convertible bonds), in number proportional to those they already own. In the event that one shareholder has the bare ownership and another the usufruct of the share, the pre-emption right is recognized to the one holding the bare ownership – with the argument that it does not constitute a fruit or benefit of the shareholder’s right (ind.: 577/2010 Official Gazette).

This right arises in any case of increase (regular or extraordinary) of the share capital. However, the case of an increase with contributions in kind is expressly excluded. The provision seems reasonable: contributions in kind are basically aimed at assets, which belong to a specific, only, person. It is provided, however, that the statute can extend the pre-emption right in cases of increase with contributions in kind (article 26 §1, section b).

A more specific content is provided for the pre-emption right, in the event that the SA has issued several classes of shares. Classes of shares, e.g., in which the individual rights to vote or to participate in the profits or in the distribution of the liquidation product are not identical. It is possible in this case, under the condition of a relevant statutory provision, to increase the capital with shares of only one of the categories. The pre-emption right is granted, then -in priority, to the shareholders of the category to which the new shares belong. If it is not exercised in its entirety, the remaining shareholders of the other classes are invited to exercise it proportionally.

Legal Nature & Transferability

As pointed out in the jurisprudence (3403/2006 Court of Appeal of Athens), the pre-emption right is part of the general share rights. In those, i.e., the rights that belong to all shareholders – in proportion to their participation in the corporate capital. It is characterized as a mixed share right as it gathers elements of property and administrative rights. Its exercise includes a declaration of the shareholder’s will to take over the new shares of the SA, in proportion to their shareholding. It constitutes, in essence, a legal restriction of the contractual freedom of the SA.

However, certain issues arise regarding the transferability of this right. The right of pre-emption, until the increase of the share capital is decided by the competent body, “…constitutes an abstract latent right (preliminary) of the definitive right (of the specific definitive right of pre-emption)” (ind. 3403/2006 Court of Appeal of Athens). This abstract right is thus in a “fluid” state. More specifically: it is subject to the suspensory condition of the decision to increase the share capital.

During the stage of the specific suspensory condition, the old shareholders do not have any claim to take up new shares. At the same time, the pre-emption right is inextricably linked to the share and cannot be separated from it. It cannot, therefore, be transferred. However, after the fulfillment of the specific suspensory condition (: decision to increase the share capital), the (conditional) beneficiaries become definitive. The specific, now, pre-emption right constitutes an independent debt right with a property character. It is therefore possible to transfer it independently.

Part of the theory, however, characterizes this jurisprudential position as incorrect. It is argued that the abstract pre-emption right must be distinguished from the pre-emption right that concerns a specific increase, even future or contingent to take place. The latter (: a pre-emption right concerning a future or possible increase) is transferable, even before the relevant decision is taken – as a right of expectation.

Second Degree Pre-emption

An important provision of Law 4548/2018 (which is also highlighted in the Explanatory Memorandum to the law on Article 26), is the provision of the “second degree” pre-emption right to unallocated shares.

It is specified, in particular, that if shares remain unallocated after the (non) exercise of the pre-emptive right, priority may be given “…to the shareholders, who have already exercised the pre-emptive right, as well as to other persons who generally hold convertible securities in shares”-(such, e.g., are convertible and exchangeable bonds and warrants, article 26 §4 in fine).

The specific second degree pre-emption right may be provided for by the articles of association. However, in the event that there is no such statutory provision, its content (and the beneficiaries) are determined by the Board of Directors who will be called upon to further offer the shares that remained unallocated.

Invitation to Exercise the Right

In order to exercise the pre-emption right, the relevant invitation must precede. Also its publication in Business Registry by actions of the SA (Article 26 §3). The deadline for its exercise constitutes its mandatory content. The statute may call for further publicity.

It is, however, possible to omit the relevant invitation and, by extension, the notification of the relevant deadline, in the following two cases: (a) if the General Assembly that decided on the increase was attended by all the shareholders – who represent the entire share capital and became aware of the deadline set for the exercise of the pre-emptive right and/or (b) if all the shareholders declared, in any way, that they will or will not exercise the relevant right. In the two specific cases, any insistence on publicity formalities would simply be formalistic and unjustified.

Excluded from the possibility of omission, however, is the case where, in the context of a regular increase, the Board of Directors is authorized to determine the sale price of the new shares. Also, on the issue of preferred shares with the right to draw interest, the interest rate and the method of its calculation (Article 25 §2). The specific exceptions seem reasonable as, in both cases, shareholders are unaware of essential information for exercising their pre-emptive right.

As an alternative to the publication of the invitation to the Business Registry for the exercise of the pre-emptive right, it is possible to replace it with a registered, “on receipt” letter to the shareholders; and this, without the need for a relevant statutory provision.

The deadline for exercising the right of pre-emption starts from the knowledge of the relevant call by the shareholders, according to the above [or from the time of the relevant decision of the Board of Directors, at the earliest, in the case of its authorization in the context of a regular increase (Article 25 § 2)].

Deadline for the Exercise

The body of the SA (General Assembly or Board) that decides on the increase also determines the deadline within which the pre-emption right can be exercised (Article 26 §2). This deadline, however, cannot be shorter than fourteen (14) days nor exceed the deadline for payment of the increase – i.e. the four (4) months (Article 20 §2).

In the event that the SA body that decides the increase fails to set the deadline for exercising the pre-emption right, it will be set by a decision of the Board of Directors (Article 26 §3). But always within the aforementioned time limits (:14 days to 4 months).

Especially with regard to the determination of the deadline for the exercise of the pre-emption right by the other (other classes of) shareholders, the competent body is also defined as the one that decides on the increase. The relevant deadline cannot be less than ten (10) days. It starts the day after the expiration of the deadline for exercising the pre-emption right for the shareholders of the category to which the new shares belong (article 26 §2 in fine).

Non-Exercise of the Pre-emptive Right

As long as the (above) deadlines for exercising the right of pre-emption have not been exercised, the free offering of the shares follows – subject to the contrary provision of the articles of association (Article 26 §4).

The competent body for the free disposal of shares is the Board of Directors. In fact, it is accepted that it is entitled to dispose of them freely even before the impractical expiry of the deadlines mentioned above. However, the existence of irrevocable declarations of all the shareholders, who did not exercise their right, that they will not exercise it is required.

The law places a restriction on the free disposal of shares by the Board of Directors. In particular, the Board of Directors cannot dispose of the unallocated shares at a price lower than the price paid by the existing shareholders. For the rest, it proceeds with the disposal at its discretion, obviously guided by the company’s interests.

The pre-emption right to increase the SA’s share capital ensures the shareholders, at the time of the relevant decision. It ensures, among other things, that their equity participation will not be reduced, without their choosing (or acceptance), the equity balances will not be disturbed, the management of the SA will not be affected. This specific assurance is critical, but not without exceptions. As for these, the critical i.e. exceptions and their consequences: our article to follow.

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (April 10th, 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.

In a previous article we had the opportunity to understand the importance of equity capital, as well as its differentiation from the property of the SA, which is subject to continuous-successive changes. The share capital, on the contrary, “…constitutes an “unchangeable” mathematical quantity, which is written in the company’s articles of association and which, upon its establishment, corresponds to the sum of the value of the contributions” (: Memorandum to the Law on SAs-4548/2018) . This does not mean, however, that the share capital cannot, under conditions, fluctuate. We will focus now on its growth as well as on specific, interesting (some, perhaps, critical) points of it. In other words: stay tuned!

The dangers

The increase of the share capital (with the exception of the “nominal increase” – for which see immediately below) is one of the main forms of financing of the SA: the “opposite “, so to speak, of financing through (bank) lending. The financing of the company through the increase of its share capital presents a number of advantages over its (bank) borrowing. However, as our subject is not the financing of the SA, we will limit ourselves to the most significant of them.

Specifically: Between the investors/financiers/shareholders and the SA, an equity and not a credit relationship is created. The SA is therefore not obliged – and, in principle, not allowed – to return the capital to its investors/shareholders. But neither does it owe them interest – at least as a rule. The shareholders of the SA, on the other hand, look forward (also as a rule) to receiving, under conditions, dividends and their participation in its profits – if any. Further: increasing the share capital of the SA strengthens the latter’s solvency, as opposed to taking on debt through borrowing.

However, it should not elude us that financing through a capital increase can lead, if the existing shareholders choose/accept/tolerate it, to the entry of new shareholders into the SA. This is especially the case when funding is sought from a crowd of funders/potential shareholders through a regulated market. The increase of the share capital of the SA is therefore possible to bring about changes, sometimes significant, in the (share) balances and the management of the company.

The Distinctions Of Raising Equity Capital

However, the term increase of share capital does not always imply a way of financing it. Let’s see why:

Nominal & Actual Increase

This distinction is a consequence of the distinction between equity capital and corporate property. Particularly:

Nominal Increase

This type of (nominal) increase in the share capital does not constitute an increase in the SA’s corporate assets. It is simply an accounting adjustment of the share capital. An adjustment to be opted by the shareholders, in order to capture the greater value, which the corporate property has acquired due to the existence of (apparent or hidden) reserves.

In this case, the SA may increase the nominal value of its existing shares. Alternatively, however, it is possible to issue new shares and grant them, without consideration, to its existing shareholders – on the basis of their participation in the share capital. In this case, the shareholders do not pay contributions. On the contrary, “…they acquire the new shares automatically… without the need for any declaration of intent. In fact, the acquisition of the new shares by the old shareholders… is mandatory in the sense that no deviating regulation is allowed by decision of the General Assembly. or an arrangement such that this acquisition will depend on the fulfillment of conditions” (ind.: 577/2010 Court of Appeal of Thessaloniki).

It is noteworthy that the decision on a nominal increase is taken by the General Assembly with a simple quorum and majority (Article 130 §3).

Actual Increase

The actual increase constitutes, at the same time, an increase in the share capital of the SA and its corporate property as, through it, new assets flow in.

Further, the actual increase is distinguished into capital increase: (a) by capitalization of profits and (b) by payment of contributions. The conditional capital increase is also actual (: cases of issuing a convertible bond loan -article 71 and granting the option to acquire shares -article 113). The practice of advance payments to shareholders for future capital increases is a variant of the increase by contributions. Further:

(a) Actual increase by capitalization of profits: This is the increase realized by capitalization (of the whole or part) of the net profits, to be distributed, of the SA. The capitalized profits may correspond to the minimum and/or the additional dividend of the shareholders (Article 161 §3).

In this case, the shareholders receive no dividend or, at least, not all of it. The otherwise distributable amount is capitalized. Shares are distributed to the beneficial shareholders, in proportion to the participation of each one in the share capital.

The decision on the specific increase is taken by the General Assembly with a simple quorum and majority.

(b) Actual increase by paying contributions: This is an increase in the share capital by paying contributions in money or in kind.

In this case, new shares are issued to cover the additional (numerical) value of the capital or until it is covered. These shares are taken over (:undertake contract) either by existing and/or (as the case may be) new shareholders. The shareholders are therefore obliged to pay the nominal (and/or, where applicable, the premium) value of the new shares.

The actual increase by paying contributions will concern us below.

Regular & Extraordinary Increase

With the criterion of the body that decides the actual increase by payment of contributions, the latter is further distinguished into regular and extraordinary (article 23 section a’).

Ordinary Increase: It is the increase of the SA’s share capital, which is decided by the General Assembly with an increased quorum and majority.

Extraordinary Increase: It is that increase, which is decided either by the General Assembly with simple quorum and majority or by the Board of Directors. This particular increase, due to its special interest, will concern us in our next article.

The Content of the Decision on the Increase

The minimum content of the decision of the competent, as the case may be, body of the SA to increase its share capital is specified in the law (Article 12 §1, par. d); whether it is a regular or an extraordinary increase. The relevant decision is always published in the Business Registry.

Specifically, in any case of capital increase, the decision of the competent body of the company must state -at least (article 25 §1):

(a) The amount of the increase in share capital. The competent body is, in principle, free to define the amount of the increase. However, in the case of the extraordinary increase, the legislator places specific restrictions on the upper limits of the increase (Article 24 §§1 and 2).

(b) The method of covering the increase (accordingly, i.e. if contributions are to be paid in money or in kind). In the case of contributions in kind, as we have pointed out in a previous article, the relevant decision must meet the conditions of the law (article 17).

(c) The deadline for covering the increase (see related previous article).

(d) The number of shares to be issued.

(e) The type of shares to be issued: whether they are common, preferred or redeemable (nominal, in any case) shares.

(f) The nominal value of the shares. The determination of the nominal value must fall within the limits set by the law: the nominal value of each share cannot be set at an amount lower than €0.04 nor higher than €100 (article 35 §1, section a’).

(g) The sale price of the shares. Setting the sale price is extremely critical. Any low price compared to its true value constitutes underfunding of the SA. In addition, in case of entry of new shareholders, it constitutes a (partial at least) depreciation of the existing shares. On the contrary, any high price makes it difficult to participate in the increase and, by extension, to finance the SA.

In any case, the sale price cannot be less than the nominal value of the share. In particular, it is provided that “…it is prohibited to issue shares below par” (Article 35 §1).

It is possible for the General Assembly, in the case of an ordinary increase only, to authorize the Board of Directors (with the decision of the increase) in order to “…determine the sale price of the new shares, or, in the case of the issue of preferred shares with the right to draw interest, the interest rate and the method of its calculation”. The authorization is submitted to the public and its validity cannot exceed one year (Article 25 §2). This feature gives the Board the opportunity to find the most appropriate time within the year from the increase decision to determine the best possible price. If, however, the Board does not take advantage of the relevant possibility, the increase is aborted.

The Approval of a Class or Classes of Shareholders

The existence of several categories of shareholders (e.g. preferred shareholders) is often found in SAs. It is provided, for these cases, that the decision of the General Assembly for a regular or extraordinary capital increase as well as its decision granting authority to the Board of Directors for an extraordinary increase “…are subject to the approval of the class or classes of shareholders, whose rights are affected from these decisions” (Article 25 §3).

The approval of the decision of the General Assembly, provided by a decision of the shareholders of the affected class, is taken in a special meeting with an increased quorum and majority (Article 25 §3 and 4).

The Control Abuse

The decision on the (regular or extraordinary) increase of the share capital is subject to an abuse control. According to the jurisprudence, the decision of the General Assembly on an increase conflicts with the general prohibition of the abuse of rights based on Article 281 of the Civil Code when the following conditions are met, cumulatively:

“(a) the company does not have any special and specific need to increase its share capital,

(b) the majority shareholders are aware that their respective minority shareholders are in fact unable to participate in the planned increase due to financial incapacity and not simply because of their opposition to the increase; and

(c) the exclusive pursuit and purpose of the majority to achieve through the increase of the share capital is the strengthening of its own position and the corresponding weakening of the position of the minority…” (ind.: 265/2011 Court of First Instance of Athens and 155/1985 Supreme Court, 832/1976 Supreme Court).

In case of abuse of the decision of the body that made it, it is possible to cancel it (articles 137 on the General Assembly and 95 on the Board).

The Possibility of Partial Coverage

The decision to increase the capital modifies, as we have already pointed out, the statute of the SA. The coverage of the increase follows the specific amendment. The coverage, however, may not be complete or may not occur at all. In this case the increase is aborted. However, it is possible to “rescue” the increase when it is not complete – it is sufficient for the relevant decision to provide for this possibility (Article 28).

If partial coverage takes place, the Board of Directors is required to adjust the article of the articles of association on the capital to the amount of the partial coverage. This decision of the Board of Directors does not constitute an amendment to the articles of association.

The law provides that the above decision is carried simultaneously with the certification of the payment of the capital. However, as we have pointed out in a previous article, the certification can also be carried out by another person (chartered accountant or auditing firm). A fact that, in this case, the law overlooks.

The increase of the SA’s share capital, which concerned us above, is, in any case, a factor speaking of the health of the company. Its realization, however, always needs careful planning. Key parameters in this direction: the statutory regulations, the observance of (according to the law) procedural requirements and the relevant “strategic” choices. All of these are able to help either (purely) in the direction of strengthening the company and/or in the direction of strengthening the majority, shrinking the minority or, as the case may be, protecting the latter. The perspective will vary according to the design and interests of the one who has the ability to make decisions but also of the one who feels “affected”.

However, the provisions of the law are important but also, to a significant extent, capable of defending individual interests.

Especially the company’s. –

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 20th, 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.