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In our previous article, we looked into the distribution of shares (with or without consideration) to members of the SA Board of Directors, its executives and employees. As well as to those who provide their services to it. We also looked into the share allocation program in the form of an option to acquire them (: Art. 113 Law 4548/2018). Specifically, the beneficiaries and the competent bodies for its issuance. Also the content of the relevant decision as well as the right of option of the beneficiaries. In the present article we will examine the free distribution of shares in the context of the relevant program (: art. 114). Basically, what we have pointed out in detail in the above article is valid. However, it is considered appropriate, for the integrated approach of the whole subject, to record a brief overview of the individual sections, with special emphasis and highlights on the particularities of the free distribution of shares and the relevant concerns.

 

Purpose, benefits and risks

We already focused on the intended purposes, benefits and risks of the sale of shares by the SA in the context of the relevant program. It should be noted that the free distribution of shares to the beneficiaries constitutes an extremely attractive tool for their (active) stay within the SA. However, it is also a tool for achieving goals and an important motivation for better quality performance. In order to manage the non-negligible risks from such a distribution of shares, we also noted that the distribution in question should be linked to the achievement of specific, realistic, goals by the beneficiaries. Especially for non-listed SAs, we have also confirmed that the free distribution of shares should concern shares that are restricted. The content of the commitment could be whatever is necessary for each company (ind.: retention obligation for a specific period of time, inability to sell to competitors, right of preference of specific shareholders, approval by the Board of Directors or the General Assembly etc.).

 

Beneficiaries of Free Shares

Beneficiaries of acquiring shares within the framework of such a program may be (art. 114 § 1), in this case as well, the members of the Board of Directors and the staff of the SA (employees and managers). Also, natural persons who bear the corresponding properties to any legal persons related to the SA in question. Also, persons who provide their services to the SA (which disposes of its shares) on a regular basis (and not circumstancially). E.g. lawyers, accountants, suppliers, distributors.

 

Competent Corporate Body

The authority to take a decision to establish a share distribution program in the form of an option belongs, by law, to the (statutory) General Meeting (art. 114 § 1). The relevant decision will be taken, here too, with an increased quorum and majority. However, when such a program has been included in the decision of the General Assembly approving the Remuneration Policy of a listed SA, an independent decision is not required.

The company’s Board of Directors cannot get involved in the whole process by taking, by authorization of the General Assembly, the decisions mentioned above. Actions of an executive nature (indicatively, the delivery of shares) remain, however, within the competence of the Board of Directors. Also, the actions to implement the disposal program belong, according to the law, to the Board of Directors. It is also possible for the Board of Directors, to be authorized by the General Assembly, not to take the central (regarding free distribution) decision, but in order to determine, simply, part of its content – incl. beneficiaries or their categories (art. 114 § 2, ed. c΄).

 

Mandatory (Minimum) Content of the Decision

The main, clearly noticeable difference between the options for the distribution of shares (free or for consideration) is the provision of consideration for the acquisition of the shares. After all, the free disposal usually takes place once (since it is not part of a program and there is no obligation to exercise an option beforehand).

The minimum, mandatory, content of the decision of the General Assembly, regarding the free distribution of shares, is provided for in the law (art. 114 § 2, ed. a’ & b’). Specifically:

(a) The origin (and class) of the shares to be disposed of.

As long as it is a sale of SA’s own shares, the special provisions of the law on own shares also applies. If, however, the program concerns shares, which are to be issued after an increase in the share capital of the SA, the corresponding provisions apply. In the latter case, the shares available may result from the capitalization of undistributed profits or distributable (ie, optional) reserves (as opposed to those, by law, mandatory such as, e.g., the regular reserve of art. 158). Alternatively, from the capitalization of the premium difference (art. 114 § 2). In each of these cases, however, there must be a relevant decision of the General Assembly (separate and/or integrated in the disposal decision). It is not excluded, however, that it may be received prior to the distribution of the shares. In addition, despite the legislator’s incorrect reference to Article 27 § 2 in fine, in these cases the exercise of a right of preference by the shareholders is not excersized (nor, by extension, its exclusion).

It is noted that, if it is decided to issue preferred shares, the relevant approval must have been obtained beforehand from the shareholders of any existing special category.

(b) The maximum number of shares to be sold.

The total nominal value of the free shares to be distributed cannot exceed, in total, one τεντη 1/10 of the paid-up (at the time of the decision) share capital. In order to find the maximum nominal value of the shares that can be allocated for free, we subtract from the percentage mentioned the nominal value of the options that may be pending for the allocation of shares for consideration (under no. 113).

(c) Beneficiaries (or categories of beneficiaries).

It is necessary to determine the persons eligible to participate in such programs (individuals or categories thereof). Since the program is aimed at employees, the principle of equal treatment as well as the principle of non-discrimination should be taken into account.

(d) The duration of the program.

The law, although it claims as necessary the determination of the duration of the program, does not provide for minimum or maximum time limits. As long as the shares to be sold are the SA’s own shares, the more specific provisions and time limits of the law apply to them.

(e) The terms of sale of the shares and other (related) terms of sale.

It is possible to condition the beneficiaries’ efficiency. Also the maintenance of their position until the exercise of the option. Or even the obligation to hold the shares for a minimum period of time.

 

Potential Content of the Decision

For the potential content of the decision of the General Assembly, regarding the free distribution of shares, the law (art. 114 § 2, ed. c) gives us an indicative context. Specifically, in said decision it is possible to include: (a) the assignment to the Board of Directors of the determination of the beneficiaries or their categories, (b) any obligation to hold the freely distributed shares for a specific period of time, as well as (c) any other condition of the share allocation program.

 

 

The free distribution of shares to the beneficiaries in the context of a relevant program that will be adopted by the SA constitutes, in accordance with what was mentioned above, an extremely attractive tool: a tool for achieving its goals, enchansing the performance of the beneficiaries, maintaining cooperation between them and the SA. The expected benefit for the beneficiaries will arise at the time of the sale of the shares in question. It is extremely useful, therefore, for the SA – if not necessary – to set restrictions on their transferability. These restrictions would be desirable – and safer – to refer to restricted shares and, according to their content, to serve the corporate interest and (obviously) the interest of the majority shareholders.-

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (September 3rd, 2023).

 

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 our previous article, we looked into the distribution of shares (with or without consideration) to members of the SA’s Board of Directors, its executives and employees. As well as to those who provide their services to it. Subsequently, we examined the program for the distribution of shares in the form of an option to acquire them (: art. 113 law 4548/2018). Specifically, the beneficiaries and the competent bodies for its issuance. Also the content of the relevant decision. In the present article we will look into the option of the beneficiaries.

 

Contingencies and the relative right of the beneficiaries

In the context of the SA’s program for the distribution of its shares, there are two options: either the payment of consideration by the beneficiaries is foreseen or their disposal is made free of charge. In the first case (acquisition for a consideration), the beneficiaries have a right of option. Specifically, the power (because it is about the power) to create, unilaterally (without, that is, any actions of the SA, but with a declaration to it), the creation of a new contractual relationship: the acquisition, i.e. of its shares. That is why, after all, the option is characterized as a constructive right. The option may therefore be exercised or not exercised. It would, however, make sense not to exercise it in case it was a sale of SA shares, against a consideration not beneficial for the acquirer.

 

The cause and basis of establishment of the specific right

The cause and basis for the establishment of the specific right (as well as the more specific content and terms of its exercise) is sought in the contractually structured text of the “option agreement”. The agreement that is (that is considered to be) concluded between the beneficiaries and the liable – distributing SA. The exercise of the specific option right brings about direct consequences (: acquisition, primarily, of SA shares by the beneficiary). Precisely for this reason, the content of the future main contract for the original or derivative acquisition of shares should be clearly included in the said agreement.

 

The advantage and benefit of the beneficiaries

The most significant of the advantages offered to the beneficiaries of said option is found at a future time. And this, because they have the freedom to weigh the circumstances and choose to exercise this right in the most benefitial to them time, or to not excersize it at all. The beneficiaries are, after all, primarily interested in the difference in the price they buy the shares in relation to their market value at the same time.

 

The conditions for the acquisition of shares

The acquisition by the beneficiary of newly issued shares of the SA (which will come, i.e. from an increase in its share capital) also presupposes the receipt of their relevant declaration to the SA. However, in the case of acquisition of shares through the issuance of new shares, the acquisition itself is under a double suspensory condition: The first concerns the adoption of a decision to increase the share capital by the competent corporate body. The second is the payment by the beneficiary of the amount set for this purpose.

 

The non-transferability of the option; compensatory liability of the SA

A stock option is, by its nature, personal and, therefore, non-transferable prior to its exercise. However, after the beneficiary has become a shareholder, they are not prevented, in the first place, from transferring the shares they acquired with the expectation of receiving a premium. However, the right to their further transfer presupposes the absence of a condition in the relevant program for their mandatory retention for a specific time. It also presupposes the absence of relevant statutory restrictions (: restricted shares).

Finally, it should be noted that, theoretically at least, the emergence of  compensatory liability of the SA, by virtue of the general provisions of the Civil Code. Such a liability would arise in favor of the entitled persons in the event that due to a culpable action (act or omission) of the administrators/representatives of the SA, the exercise of their above right becomes impossible or ineffective.

 

It is up to the discretion of the beneficiaries to acquire the shares offered free of charge, or for consideration, by an SA as part of a share distribution program. When the said shares are available for consideration, the beneficiaries will be asked to weigh the relative benefit on the basis of the amount they will be asked to pay in relation to the market value of the shares. This weighting results in the exercise (or not) by the beneficiaries of the relative right of option that the law recognizes. Their benefit presupposes the possibility of immediate or, at a later time, sale of their shares. This will be mentioned in the relevant provisions of the share allocation program. Also, especially for SAs with shares not listed on a regulated market, in their relevant statutory provisions. However, the most important thing is not, in any case, the legal part and the relevant regulations. What, in any case, is above all else is the business choices and achievement of the goals the SA pursues through the issuance of the program in question. Regarding the free distribution of shares: see our next article.

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 27th, 2023).

 

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 our previous article, we looked into the distribution of shares (with or without consideration) to members of the SA’s Board of Directors, its executives and employees. Also to those who provide their services to the SA. We were also concerned with the share distribution program in the form of an option to acquire them (: art . 113 of law 4548/2018). Specifically, with the beneficiaries and the competent bodies for its issuance. But what can/should be the content of such a decision to distribute shares?

 

Mandatory and Potential Content

The content of the decision (of the General Assembly or of the Board of Directors) for the allocation of shares in the framework of a program is regulated by law ( art . 113 §2). Such a decision has, at a minimum, a mandatory content.

 

Mandatory (Minimum) & Possible Content of the Decision

According to the law ( art . 113 §2, sections b and c), the minimum content of the decision on the distribution of shares is:

(a) The origin (and class) of the shares to be disposed

The determination of the origin of the shares to be allocated is deemed necessary (also) to clarify the legal framework that will be put into (supplementary) application in each case.

In particular, if the program concerns the disposal of own shares (which the SA already owns or is about to acquire), the special provisions of the law on own shares shall be applied – additionally – (: art . 113 §2, section b ) in combination with Articles 49 and 50 of Law 4548/2018 on own shares). In this case, it is a derivative acquisition of shares by the beneficiaries.

If, however, the program concerns shares, which are to be issued after an increase in the SA’s share capital, then the corresponding provisions of the law will be applied -supplementarily- ( art . 23 et seq.). Indicatively, the decision will include (among other things) the nominal value of the shares and the deadline for payment of the capital. In this case, however, this will be an original acquisition by the beneficiaries.

In the above context of the supplementary application of provisions of the law, it is pointed out that the determination of the category of shares to be allocated is also important. And this, despite the fact that the law does not impose, as necessary, the relevant determination. The relevant omission is rightly argued to constitute an inadvertent detour.

In exactly the same context, if it is decided to issue preferred shares, the relevant approval must have been obtained beforehand from the shareholders of any existing special category.

(b) The maximum number of shares to be sold

The competent corporate body (GA or BoD) is also required to determine the maximum number of shares to be sold. Regardless of their origin, the total nominal value of the shares to be allocated may not exceed, in total, one 1/10 of the paid-up (at the time of the decision) share capital (art. 113 §2 a’).

(c) The sale price

The sale price of the shares in question is a necessary element of the decision of the respective competent corporate body – and it is in fact left to the latter’s discretion. The body in question will decide, alternatively, either the disposal price or the method of determining it. As it follows, however, from the letter of the law, it is not necessary to provide a specific price. It is possible to specify a range of prices (minimum and maximum). In this case, either the decision of the General Assembly will provide for the sale price, determination method or price range, or the Board of Directors will be authorized to determine them.

However, the determination of the aforementioned prices should not exceed the limits of the law. If, for example, it is a sale of newly issued shares after a share capital increase, the minimum price of the shares cannot be less than their nominal price (art. 113 §2, with an express reference to art. 35 §2 ).

Additional limitations are also imposed by the nature of the option. In particular, given that upon its exercise (or more precisely, the transfer of the beneficiary’s relevant declaration to the SA) the intended contract of taking (or selling, on the own) shares is automatically drawn up, their price should be fixed or, at least, definable. Clearly, it is sufficient – as we have already established – that the relevant provision mentions the method of the determination of the sale price (eg, for listed shares, as an average (or percentage thereof) of the market price in a specific reference period). The provision, however, of wide margins of variation may ultimately negate, as is rightly argued, the definition of the content of the right.

Given, however, the purpose of the specific institution examined, it is desirable that the formulation of the sale price of the shares makes their acquisition attractive for potential beneficiaries. The closer this price approaches the intrinsic, market (or, as the case may be, stock exchange) value of the stock, the less attractive the distribution program will become.

(d) Beneficiaries (or categories of beneficiaries)

The competent body must, furthermore, determine the beneficiaries of participation in the share allocation program (either individually or their categories).

Since the program (also) aims to provide incentives to persons associated with an employment relationship with the SA, the corporate body that makes the relevant decision is obliged to take into account during the said determination (and the conditions of participation in the program) the principles that pervade in Labor Law. In this case: the principle of equal treatment (which also covers benefits in kind, such as shares, in exchange for the provision of work). Also, the prohibition of discrimination.

(e) The duration of the program

Although the duration of the program must be included in the relevant decision of the competent body, the law does not, in principle, provide for a minimum or maximum duration. Usually the duration varies, on a practical level, between three and five years. However, in the event that the shares under disposal are the SA’s own shares, the more specific provisions and time limits of the law apply  (art . 49).

The entry into force of the decision of the corporate body to establish the program and the conclusion of the option agreements with their beneficiaries also mark its start.

The duration of the program consists, as a rule, of two individual periods.

The first concerns the “vesting period” after which the beneficiaries have the right to exercise their rights. This period often functions as a way of control and evaluation by the SA of the efficiency of the beneficiaries. In fact, the successful outcome of said monitoring cannot be ruled out as having been set as a condition for the exercise of the option.

The second concerns the “exercise period”. It is during this period that the respective beneficiary will have the possibility to exercise (or not) their right.

(f) The terms of sale of the shares and other (related) terms of sale

For reasons of corporate interest, it is not excluded that additional conditions may be imposed by the competent body within the decision to allocate shares. Their payment, in fact, is a possibility (and, in our opinion, mandatory) to constitute a condition for the acquisition of the shares.

In addition to the efficiency, to which we have already referred, it is possible that the program stipulates as a condition the preservation of the status of the beneficiary (e.g. member of the Board of Directors, manager, employee, etc.) until the exercise of the option. Or even the obligation to hold the shares for a minimum period of time after their acquisition.

It is also possible that the acquirer will be given a specific deadline for the payment to the SA of the consideration for the acquisition of the shares.

 

Potential Decision Content

In addition to what is mentioned above as mandatory (but also potential) elements of the content of the disposal decision, its potential content may include (art. 113 §2, section d):

(a) The assignment to the Board of Directors of the determination of the beneficiaries or their categories. In practice, the Board simply specifies the categories already established by the General Assembly, having taken into account eligibility criteria (such as the successful and efficient provision of their services, etc.).

(b) The manner of exercise of the option. E.g., the content and type of the beneficiary’s declaration to the SA for the exercise of their right.

(c) Any other term of the share allocation plan. E.g., the provision in the terms of disposal of the company’s reserved shares regarding the extraordinary and voluntary nature of the relevant program. The relevant term acquires meaning in the context of Labor Law. In particular, when beneficiaries become employees, this condition prevents the establishment of a commitment by the SA to re-establish the program in the future, in which case also in case of failure to carry out a unilateral harmful change in the working conditions of the beneficiary employee.

 

We are sufficiently guided by the law regarding the mandatory content of the decision of the competent body of the SA on the terms of the share distribution program. We should certainly focus our attention on this (: the mandatory content) – in order, of course, to avoid invalidities and problems. However, the additional (potential) conditions – apart from, i.e., those required by law, are no less important for the SA. Through them, in particular, we will ensure its success, the achievement of the objectives and the satisfaction of the business needs and aspirations of the SA. However, from the side of the beneficiaries, they have the possibility to exercise (or not) the relevant right (: right of option) for the acquisition of the SA shares against consideration, in the context of the disposal program – unless it is a free disposal. About them, however, see our next article.

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 20th, 2023).

 

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.

We explored, in our previous article, the distribution of shares (with or without consideration) to members of the SA Board of Directors, its executives and employees. Also, to those who provide their services to it. We will be concerned, here, with the share allocation program in the form of an option to acquire them (: art. 113 of law 4548/2018). The beneficiaries, in particular, and the competent bodies for its issuance.

 

Beneficiaries of Acquisition of Shares

The SA (more precisely the General Assembly or, subject to conditions, its Board of Directors) may establish a share allocation program, in the form of granting an option for the purpose of acquiring its shares (art. 113 §1 Law 4548/2018).

Beneficiaries of such a program may be the members of the Board of Directors and the staff of the SA that disposes of shares. Also, natural persons who have the corresponding properties in any legal persons connected to the SA in question (see art. 32 of Law 4308/2014).

The concept of “personnel” includes the natural persons employed by the SA in a dependent employment relationship (in accordance with the dependency theories developed in the context of Labor Law). The concept of “personnel” also includes management employees [despite the fact that they hold “… a position of supervision or management, or a position of trust” (: art. 2 par. a’ of the International Convention of the Washington International Conference, sanctioned by the first paragraph of Law 2269/1920) and despite their high degree of independence and their significantly higher salaries compared to other staff].

The right to acquire shares is not recognized, on the contrary (in the best opinion – and despite the lack of a relevant legislative provision), to persons who are employed by the company on a temporary, merely, basis (e.g. in the case of an employee employed by the SA in the context of a hiring-out of workers program). The specific assumption, in fact, seems reasonable as any allocation of shares to employees of this category cannot meet the justification and purposes of the institution: The creation, i.e. incentives for optimizing their performance and consolidating strong ties with the SA.

In addition to the above persons, the share allocation program – as it was also applicable based on the existing provision (: art. 13 §13 law 2190/1920) – can be addressed, in addition, to anyone who provides their services to the SA (who disposes of its shares) on a fixed (and not occasional) basis (: art. 113 §1 in fine). Among the beneficiaries it is possible to include persons connected to the company through relationships of independent services, salaried project mandate, etc. However, those who provide their services on a regular basis to companies affiliated with the SA cannot be beneficiaries.

In the category of beneficiaries who provide their services on a fixed basis, it is possible to include, therefore, regular partners of the company whose provision of services is characterized by repetition. As such they could be lawyers/solicitors, accountants, suppliers, distributors and so on. Of course, any occasional and haphazard cooperation is not enough. Precisely because of the valuable (usually) contribution of the above persons to the corporate development, it is reasonable that the SA wishes not only to reward them, but also to strengthen and maintain the ties between it and them.

 

Competent Corporate Body

Competence of the General Assembly

The authority to take a decision to establish a share distribution program in the form of an option belongs, by law, to the (statutory) General Assembly. A summary of the relevant decision of the General Assembly is published in the company’s file kept at the Business Registry (art. 113 §1 section a’).

The importance of the specific decision makes understandable the requirement of the law for an increased quorum and majority regarding its adoption (art. 113 § 1 paragraph a’ – as correspondingly, it is also required in the (regular) increase of the share capital). Through this decision, moreover, the shareholder composition of the SA is changed and shares are allocated to third parties. Such a change can only presuppose broad acceptance by shareholders.

It is noteworthy that the shareholders of the SA are not granted a right of preference in the event of an increase in the share capital in order to distribute the shares that will arise to the beneficiaries of such a program (art. 113 §3 in fine). Besides, the matter of possible exclusion of the right of preference of the old shareholders does not arise when the distribution of shares is addressed to the staff of the SA (: art. 27 §2 in fine). And further: since, from the beginning, there is no right of preference, it is not possible to ask (despite the wording of the law) the question of its exclusion.

It should be noted that there is no need for authorization of the distribution program by virtue of a decision of the General Assembly if such was included in the decision deciding on the Remuneration Policy (see Petition Report n. 4548/2018 on art. 113 §5).

Competence of the Board of Directors

The legislator did not exclude the involvement of the Board of Directors from the process of establishing a share allocation program. In particular, the company’s Board of Directors can:

(a) Obtain, exceptionally, the competence to take the relevant decision, after a relevant authorization from the General Assembly, which is also obtained with an increased quorum and majority (art. 113 §4).

The aim of this regulation is, on the one hand, to ease the work of the General Assembly and, on the other hand, to create a program that is as attractive as possible (in the prevailing market conditions). The authorization to the Board of Directors follows, in particular, the corresponding standard that also applies to the authorized competence of the Board of Directors for an extraordinary increase (art. 24) of the company’s capital. Especially regarding its maximum five-year duration. The above-mentioned authorizations of the Board of Directors (: to establish a share allocation program and an extraordinary increase) do not affect each other – despite the fact that they are, potentially, concurrent (art. 113 §4 section b’). And, further: the fulfillment (or not) of the conditions applicable, by law, in one case (e.g. the quantitative limitations of art. 24) in no way affect the fulfillment (or not) of those applied in the other.

Although according to article 113 §4 sec. c) the decision of the Board of Directors “…is taken under the conditions applicable to the General Assembly”, a normal-only, and not an increased, quorum and (absolute) majority of its present and represented members is required (: art. 92 §§1 and 2). Moreover, there is no legislative provision for increased percentages in terms of decisions of the Board of Directors.

(b) Participate, in part, in determining the minimum content of the program, after a relevant authorization from the General Assembly (art. 113 §2 section c)

The decisive competence for the allocation of shares does not escape, therefore-in this case, the General Assembly. The Board of Directors can, e.g., (also) be assigned the determination of the beneficiaries.

(c) Take decisions of an executive nature and take actions to implement the disposal program.

The specific competence of the Board of Directors does not require the authorization of the General Assembly. On the contrary, it is provided for by law.

In this context, the powers of the Board of Directors include, among other things, the issuance of share acquisition rights certificates to the beneficiaries of the program who have exercised the option (art. 113 §3 paragraph a’). The nature of said certificates is, exclusively, evidential. This implies that it simply incorporates the beneficiary’s claim on the shares to be acquired.

The issuance of the specific certificates does not imply the self-righteous emergence of the shareholding relationship. This depends on the fulfillment of the conditions set in each case. In this context, the issuance and delivery by the Board of the shares provided for by the program to their beneficiaries as well as the acquisition, consequently, of the status of shareholder takes place, in principle, with the conclusion of the contract for the acquisition of (newly issued) shares or sale (of the already existing) own shares of the company. The shares that have already been issued are delivered to their beneficiaries per calendar quarter – at the latest (art. 113 §3 section a’).

In the event that shares resulting from an increase in the share capital are available, the Board of Directors is responsible for the payment in full of the amount of the increase. Also, for the amendment of the relevant article of the company’s articles of association (art. 113 §3 sec. a’ and c’). The actions in question take place on a regular basis – per calendar quarter (by way of derogation from the provisions of art. 20). They are also subject to the relevant publicity formalities.

 

Beneficiaries of the share allocation program in the form of an option to acquire them are, primarily, employees, executives and members of the SA’s Board of Directors. But they can also be close regular partners of the company. The competent body for the issuance of such a program is the General Assembly – subject to conditions and the Board. But their decisions need special attention. (And not only in substance but) also on a legal level. Correspondingly, serious issues arise in the case of free distribution of shares. About them, however, see our next article.-

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 13th, 2023).

 

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 distribution of shares (with or without consideration) to members of the SA Board of Directors, executives and employees is a modern and alternative way (additional-in-kind) of rewarding them for their services. The institution is not new. Its spread and development, however, in the Greek corporate world is due – one might say – to the (relatively recent) codification of the (existing, albeit scattered) relevant regulations with the law on SAs (art. 113 – 114 of law 4548/2018). The benefits are significant. And the risks, respectively, not insignificant.

 

Historical Review – Current Legislative Framework

The institution of the distribution of shares to members of the Board of Directors of the SA, to those, in general, who exercise management as well as to its employees, was introduced in Greece in the late 1980s. Since then, however, it has undergone multiple legislative interventions. The basic network of provisions was established, by authorization of no. 25 §2 of Law 1682/1987, with the Presidential Decree no. 30/1988. The latter contained regulations regarding the free allocation of shares to employees (“stock awards”), as well as the granting of options to acquire shares for consideration (“stock options”) – (see, in this regard, Memorandum to law 4548/2018 on art. 114).

However, the arrangements of said Presidential Decree for stocks options (it is rightly argued that) were implicitly abolished due to the special and detailed regulation of options by (previously enforced, now) par. 13.9 of law 2190/1920. On the other hand, until the entry into force of Law 4548/2018, the provisions of the above Presidential Decree remained in force, which were related to the acquisition and subsequent disposal by the SA of own shares as well as the issuance and disposal of shares from capitalization of profits (see in this regard, Memorandum to law 4548/2018 on art. 114).

Today, the possibility of establishing a “program for the distribution of shares to the members of the Board of Directors and the company’s staff in the form of an option” is enshrined in the law on SAs (Art. 113 Law 4548/2018). According to the Memorandum of Law 4548/2018 on the specific article, with the provision in question the (flexible) provisions of paragraphs 13 and 14 of Article 13 of Law 2190/1920 are repeated (as these were introduced by virtue of article 19 of law 3604/2007 and replaced the -mentioned above- 13.9).

As for the regulatory framework for the possibility of free allocation of shares (outside, that is, of a program), this was still being determined, as was said above, even after the implementation of par. 9 para. 13 of law 2190/1920, from the above Presidential Decree its related regulations, however, ceased to be valid, firstly, with the introduction of the current (today) provision of art. 114, Law 4548/2018.

According to the law (: art. 114 §4 ed. a΄4548/2018), the SA is allowed to decide on a combination of the above alternative share allocation systems. This particular solution serves, one might say, particularly the (intentionally unregulated – due to the complexity it would create) case of shares being made available by the company, not without consideration, but, simply, at a lower price than their nominal value (see Memorandum to Law 4548/2018 on Article 114).

 

The Systematic Integration of Current Regulations

The modern legislator decided to include the above distinct provisions on the allocation of shares, in the context of Law 4548/2018, in the section on the remuneration of the members of the Board of Directors.

Under the previous regime, the corresponding provisions were part of the share capital increase provision. The systematic inclusion of the now independent regulations on the distribution of shares in the section on the remuneration of the Board members becomes more correct under the following position: the distribution of shares does not require an increase in share capital. It is possible, on the contrary, to take place through already existing, own shares.

However, the above inclusion does not correspond to the following: Any shares (existing or newly issued) may be allocated to persons who are not members of the SA’s Board of Directors, but are part of its staff.

Clearly, the aforementioned inclusion raises the question of whether or not the other provisions on remuneration for members of the Board of Directors (and in general, for the directors of the SA) apply or not in the case of the sale of shares. Reasonably (it is argued that) the provisions on the disposal of shares are more specific and – in principle – prevail.

Given the above, it should be noted that in the context of art. 113 and 114, the concept of “advance” fees is not answered. And this is because, (as we will see in our next article), the time points for exercising the options (in the case of the “disposal program” of art. 113) or acquiring the free shares (of art. 114) are predetermined.

In addition, due to the increased-by-law collateral that governs the allocation of shares, there does not seem to be any room for judicial intervention, with the aim of reducing the remuneration of a member of the Board of Directors in accordance with what the law provides (: art. 109 §5 law 4548 / 2018). Such a decision would be in contrast with accomplished but also, probably, irreversible events. On a practical level: it would require, in practice, disproportionate and rather impractical remedial actions (: return of the allocated shares and, as a result, further disruption of the shareholding composition of the SA).

However, the possibility of applying the provisions concerning the remuneration policy (art. 111) and the remuneration report (art. 112) is not there. As for listed companies, in fact, there is, by law, an obligation to include in them (remuneration policy-report) the rights of those who exercise the management of the SA to participate in a share distribution program and/or to acquire free shares (art. 109 §1 and art. 110 §1). As for the other SAs, a corresponding obligation may arise on the basis of a statutory provision (art. 110 §1 ed. c΄).

It is possible that the distribution of shares to a member of the Board of Directors takes place on the basis – not of the organic one, but – of the possible, special relationship that connects them with the SA (e.g. work). It is considered more correct in this case to observe – along with the provisions for the disposal of shares – the special regulations regarding transactions with related parties (: no. 99-101 of law 4548/2018) .

 

Rationale & Purpose of Regulations

The distribution of shares to employees, members of the Board of Directors and/or to the persons, in general, who provide services to the SA constitutes a different (: distinct) method of their compensation and reward. This is, as a rule, an attractive tool for the (active) remaining of the beneficiaries with the company. However, it is also a tool for achieving goals and an important motivation for better quality performance. However, in this context, it is not excluded that the beneficiaries will be lured into making and executing potentially beneficial business decisions, with the aim of (both) achieving goals and (also) obtaining other-new shares. Such decisions entail, however, significant business risks – for which see below.

The beneficiaries of the shares expect (reasonably so) the consolidation of their relationship with the SA (also) on different/additional foundations – after their acquisition of shares of the SA but also the consolidation of the status of “shareholder-(co)owner”. The conflict of interest found between those who exercise the management of the SA and the SA itself (and its shareholders) is mitigated. Especially with regard to employees, the traditional relationship of dependence between them and the employer SA ceases to be the only link.

 

Additional “income” of beneficiaries and its payment

The main objective of the above institution (besides the creation of incentives for the beneficiaries – for the benefit of the SA), is not the increase of the property of the latter. On the contrary, it is the creation of an alternative (and supplementary) income for the beneficiaries. In fact, the payment of this type of remuneration by the SA – given that it does not constitute a salary or any kind of consideration or compensation – is particularly advantageous. And this is because it is not part of its fixed charges but is found at the time of the distribution of the free shares or the distribution of dividends to the shareholders.

On the other hand, the beneficiaries of the above distribution of shares look forward (secondarily) to the relevant “investment” and to its annuities (ind.: dividends). However, in any case, they look forward to the possibility of liquidation (and ultimately liquidation) in order to obtain any financial benefit. It is up to the future buyers of the investor shares to pay it. The beneficiaries are expected to collect the difference between the preferential (or non-existent) purchase price of the shares and the price of their future sale.

The allocated shares may be traded on a regulated market. The price that will be paid to the owners of said shares depends on their market value. Based (also) on this they will choose the time to exercise their right to sell – when they assess the benefit to be satisfactory.

 

The (not negligible) risks for SA and its shareholders…

The above-mentioned preferential distribution of shares (according to art. 113 & 114 of Law 4548/2018) can have significant (short-term, especially) benefits. Among them it is worth focusing on the boost (sometimes significant) of the profitability of the SA. Also, in the high yields for the beneficiaries. However, it is possible that, in the short and long term, such a preferential distribution of shares will be harmful to the company’s interests. Possibly, in fact, also cause a financial loss to the company and to the existing shareholders. In particular, when the disposal in question is done recklessly and/or without sufficient safeguards for the company and the shareholders.

To mitigate the associated risks, it is prefered that the decision to dispose of shares is based on realistic financial prospects. Accordingly, the (possibly) set goals should be realistic. Also closely monitor the company’s financial results as well as the business decisions taken by the beneficiaries. To closely monitor and evaluate, continuously, the performance of the latter.

 

…especially for unlisted SAs

As far as SAs whose shares are not traded on a regulated market are concerned, however, there are particular risks from the (future) liquidation of the shares that were the subject of the kind of the disposal in question by the SA. The members of the Board of Directors or the employees who acquired them will expect to benefit from their liquidation. This, however, is the most sensitive and dangerous point: Their potential buyers can be investors, shareholders of the SA itself – even its competitors. Moreover, we should not forget that the beneficiaries-recipients of the distribution of the shares are human beings; therefore: susceptible to death, legal incapacity, but also to changes in their feelings and commitments towards the company and its owners.

Accordingly, it is considered absolutely necessary that any incentives in favor of members of the Board of Directors or employees of the SA for the acquisition of its shares concern  and not freely transferable shares – as long as these are companies with shares listed on a regulated market.

 

The free (or for a reduced consideration) distribution of SA shares to members of the Board of Directors, management, executives or employees, can become a valuable tool for boosting profitability and further development of the company. It is, in any case, an attractive tool for the recipients of the shares. But it is a given that, especially for SAs whose shares are not traded on a regulated market, the inherent risks are not at all negligible. And, in any case, it is imperative to address them. Regarding the procedure, however, and conditions for the disposal of the shares in question, see our next article.-

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 8th, 2023).

 

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 our previous article, we covered the basics of leasing as well as its financial importance for the business. In the present article we will look into the various forms in which the leasing contract appears. Also, the critical legal issues that may arise in the context of its conclusion and operation.

 

Forms of appearance of leasing

Within the framework of the principle of freedom of contract and since most of the provisions of the relevant law (:law 1665/1986) constitute soft law, the lease appears in transactions in several variations. In summary:

Simple leasing (lease)

The most important form of leasing is the simple leasing (: “leasing” in international transactions). The prospective lessee first approaches the supplier and negotiates (usually with them) the specifications of the thing and the price. They then goe to the leasing company, which buys or imports the thing in its name under the terms agreed by the lessee, pays the price and the supplier is instructed to deliver the thing to the lessee, with whom they have meanwhile concluded the leasing contract.

Mixed leasing (operating lease)

A key feature of mixed leasing is the fact that the leasing company undertakes the additional obligation (apart from granting the use of the object) to keep it suitable for the agreed use during the lease. That is, it undertakes the obligation of maintenance, repair, etc. This form is preferred in cases where the prospective lessee wishes to cover a short-term need of their business and the duration of the lease is generally short. The leasing company, assuming this obligation, must keep the thing in good condition. Its additional benefit is that it retains the ability to enter into corresponding, successive, contracts, making a profit from the repeated leasing of the same thing.

Reverse leasing (sale and lease back)

In reverse leasing, the lessor leasing company has previously purchased from the lessee the thing (movable or immovable) that will be the subject of the lease. In this way, the lessee succeeds in enhancing their liquidity from the received price without at the same time depriving them of the use of the thing. In practice, two contracts (sale and lease) are drawn up, but they are so closely related to each other that the drawing up of one constitutes a jurisprudential foundation (or condition) for the drawing up of the other. In the same context, the termination of one is a great reason for the termination of the other.

Subleasing

leasing company does not buy the object to be leased, but leases it from a third party and then sub-leases it to the (sub)lessee. This form serves the leasing companies, which do not assume the full cost or risk of acquiring the thing. This, in particular, happens in cases where the wage is a specialized item with rare demand.

 

Individual legal issues

Leasing is governed by Law 1665/1986, which does not, however, regulate the abnormal development of the contract. The fact that it essentially constitutes an unregulated contract has created legal concerns regarding its legal nature and the rules of law that must be applied. Undeniably, this is a mixed contract, in which there are mandatory elements of the lease of a thing and an agreement of preference and potentially includes elements of sale, order, etc. Despite the fact that there is a difference of opinion regarding whether the predominant element of the leasing contract is the lease or the credit, it is considered appropriate that each leasing contract be treated individually according to its individual elements.

Immediately below, an approach of the main legal issues that may arise in the context of a leasing contract, the more extensive analysis of which obviously is not within the limits of this article.

The lessor’s relationship with the supplier

The lessor is connected to the supplier of the thing to be leased by a contract of sale. However, it is a contract of sale which presents several peculiarities and it is validly argued that it is a genuine contract in favor of a third party (the lessee). In particular, the lessor usually entrusts the lessee with conducting the negotiations with the supplier, who must deliver the object of sale (lease) to the lessee. Of course, the question of responsibility arises here from the negotiations regarding whether, in case of damage to the supplier, the lessor or the lessee is responsible. And this, despite the fact that the liability of the lessor appears to arise from the fact that the lessee acts as an assistant to the lessor (CC 334). With the due delivery of the lease from the supplier to the lessee, the lessor fulfills their relative obligation towards the latter and acquires ownership of the lease themselves.

The assignment of the rights of the lessor from the sale to the lessee

It is usual in practice to conclude a term according to which the lessor does not have any liability towards the lessee for legal or factual defects or for lack of the agreed properties. As a “counterweight” for the exclusion of this liability, it is customary to agree on the assignment by the lessor to the lessee of their relevant claims against the supplier. It is an assignment of specific claims and not a transfer of the entire contractual obligation.

Both the exclusion of the lessor’s liability and the aforementioned assignment should be expressly agreed in the contract, so that an interpretation of the contract is not required to establish whether there is an exclusion of liability and an assignment of claims respectively.

The responsibility for the other cases of non-performance, i.e. non-delivery or late delivery, rests with the lessor, as it happens in common rental agreements. The conclusion of a relevant exculpatory clause with simultaneous assignment to the lessee of the corresponding claims is not guaranteed that it will be considered valid. However, even in this case (: judgment regarding its validity) we will not, as a rule, be led to the exemption of the lessor if the lessee fails to be satisfied by the supplier. The final ruling on the issue is a matter of wording and interpretation of the relevant exculpatory clause.

The assumption by the lessee of the risk of accidental damage or destruction of the object of the lease

A leasing contract according to which, unlike in common rental agreements, the lessee will bear the risk of accidental damage, destruction or theft of the leased item. This means that the lessee, in any of these cases, will still owe rent to the lessor. And not only that: they will have to compensate the latter in the event that, at the end of the contract, they are unable to return the use of the object.

The specific condition has the consequence of disturbing the balance of the rights and obligations of the contracting parties at the expense of the lessee (which is contrary to articles 2 § 6 of Law 2251/1994 and 288 CC). It could reasonably therefore be invalidated as abusive.

Such a potential nullity can be avoided by assigning the lessor’s claims to the lessee against the insurance company for insurance compensation (the lessee is legally obliged to keep the thing insured for all the above risks, but the policyholder is the lessor as owner of the object leased). Also, against the third party who damaged or destroyed the object.

The validity of the General Terms and Conditions (GTC) included in the leasing contract

Leasing companies should include in the contract pre-formulated conditions (General Terms and Conditions – GTC), which (usually) have not been the subject of prior individual negotiation with the prospective lessee. The validity of clauses in favor of the lessor regarding the exclusion or limitation of their liability included in the GTC are judged based on the relevant provisions of the Civil Code. In any case, while examining the validity of the GTC, one should check if there is a substantial disruption of the rights and obligations at the expense of the lessee (which conflicts with the provisions of articles 2 § 6 of Law 2251/1994 and 288 CC). It is worth noting, that in the event that the GTC provides for the lessee’s waiver of the right to terminate the contract for a great reason, this waiver should be considered invalid. And this is because the right to terminate for a great reason is based on the compulsory provisions of the Civil Code.

 

Leasing is, undeniably, a useful tool in the hands of businesses because of the financial and tax advantages it presents. However, the peculiarities of its legal nature – as well as the (complex) legal issues that arise in the context of its conclusion – require the special attention of companies that choose it to serve their operational needs. However, with the appropriate legal guidance, both during the conclusion and during the operation of the leasing contracts, businesses will enjoy the relevant benefits while protecting, at the same time, their interests in the best possible way.-

Evdokia Kornilaki
Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July 30th, 2023).

 

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.

Leasing is a modern form of contract, widely used in many countries of the world, because it constitutes an extremely useful financing tool in the hands of businesses. Leasing in Greece is governed by Law 1665/1986, but the case of the abnormal development of the contract remained unregulated. Until recently, a lease could only be entered into by a company or a person practicing a relevant profession. The possibility of concluding a lease was recently extended (: art. 131 of Law 4887/2022 which amended Art. 1 of Law 1665/1986) to individuals as well. The utility, however, of this contract remains, without a doubt, of particular value; especially for businesses.

 

Benefits of the Leasing Agreement

The leasing contract provides the possibility to the entrepreneur, who needs for the exercise of their activity, either building facilities (incl: offices, warehouses, factories) or professional equipment (incl: vehicles, special machines depending on the business) while they are interested, at first at least, to use them by leasing them from the lessor (special purpose company) by paying the agreed rent. They succeed, thus, in meeting their relevant operational need without requiring them to disburse the amount (usually very high) or to take a loan with interest for the acquisition of ownership of the property.

 

Object

The object of the lease can be any movable thing (including aircraft and private or commercial pleasure boats) or immovable property.

 

Landlord And Tenant

A lessor can only be a limited liability company or a financial/credit institution with the sole purpose of entering into leasing contracts (: art. 2 § 1 of the aforementioned law). On the other hand, a tenant can be any natural or legal person, either a business or an individual (according to the above-mentioned change brought about by Law 4887/2022).

 

The Involvement of the Leasing Company

The leasing company often acquires the ownership of the thing to be leased, following a suggestion from the prospective lessee, who determines its specific characteristics. In some cases, the prospective lessee undertakes the negotiations with the seller-supplier, who will sell to the leasing company the object of the leasing contract.

 

The Rent

The rent is calculated in such a way that the amount to be paid in total by the lessee throughout the duration of the leasing contract covers: (a) The capital for the acquisition of the thing (in whole or in most part), (b) The interest, (c) The lessor’s operating expenses and (d) The lessor’s profit.

At the same time, the rent is determined in an amount, which the entrepreneur will – in the normal course of things – be able to pay throughout the duration of the leasing contract.

 

Basic Terms

Basic (usual) terms contained in the leasing contract (: article 1 of Law 1665/1986) provide that at the end of the lease the lessee has the following options:

(a) unilaterally renew the lease for a certain period by paying a certain (and greatly reduced in relation to the originally contractually agreed) rent

(b) to purchase with their declaration to the lessor the object of the leasing contract (even before the end of the contract) by paying a much reduced – in relation to the commercial value of the thing – price, which is specified in the leasing contract

(c) to return the object of the contract to the lessor

The above (under a and b) possibilities constitute the so-called ” right of choice” of the lessee.

The duration of the lease is always fixed and in fact a minimum duration of three years is provided for movables, five years for aircraft and ten years for real estate (: no. 3 § 1 of Law 1665/1986).

 

Drafting

Finally, the leasing contract must be drawn up in writing. In case it concerns a movable thing, the private document is sufficient, while in the case of renting a property, the notarial form is required. All leasing contracts are registered in a special book at the Court of First Instance of Athens. When it concerns real estate, the contract is registered in the relevant transfer books of the region where the real estate is located. If it concerns an aircraft, in the respective aircraft registers.

 

The Financial Significance Of The Leasing Contract For The Business

The leasing contract is a flexible form of financing with significant benefits for small and medium-sized enterprises in particular. The economic advantages of this contract have led many companies to choose it. In particular, when there is a need to acquire or modernize their equipment. Also, in case the company seeks to expand or renew the premises of its business establishment.

Perhaps the most basic advantage of this contract is the fact that a company can acquire the use of the object it needs to carry out (and/or improve, increase performance, expand) its activity without the simultaneous allocation of equity capital (which would be required for the corresponding purchase) or resorting to bank lending. In this way they use the thing they need, generate income (also) from the exploitation of the thing which covers, even partially, the agreed rent. At the same time, the amount saved by concluding the lease can be allocated/invested for other business purposes.

Another important advantage is the fact that the object of the lease, since it does not belong to the lessee’s property, cannot be confiscated by their creditors. In the same context, the objects of leasing do not appear in the company’s balance sheets as assets.

 

Tax Benefits

Leasing is attractive not only to leasing companies, but to the businesses that will choose it as a means of financing as well, because the law (article 6, law 1665/1986) provides many tax benefits. Particularly:

A. They are exempt from any tax, fee, levy, right in favor of the State and generally third parties (excluding income tax and VAT):

(i) The contracts by which the leasing companies acquire (by ownership or possession) the movable things (excluding means of transport) that will be the subject of leasing

(ii) Leasing contracts

(iii) Contracts for the assignment of rights or the assumption of obligations from a lease

(iv) Rents from leasing contracts and their collection documents

(v) The price of the sale of the object of the lease from the leasing company to the entrepreneur – lessee.

 

B. Exempt from real estate transfer tax:

(i) The transfer of the leased property from the lessor to the lessee at the end of the leasing contract

(ii) The acquisition of the leased property by the lessee before the end of the finance lease

(iii) Real estate purchase contracts from leasing companies for the purpose of leasing the property to the seller, who acquires the status of lessee (this is the reverse leasing that will be discussed in the next article).

 

C. The rents paid by the lessee company are considered its operating expenses and are deducted from its gross income

D. The rights of the notaries before whom the leasing contracts are drawn up are limited to the minimum limits of their rights that apply to loan or credit contracts from investment banks for productive investments

E. In the case of setting up real collateral for the leasing company’s claims arising from the lease, as well as for the elimination of the related encumbrances, the payment of reduced fees for their registration is foreseen.

F. Loan and credit contracts to leasing companies from banks as well as leasing contracts between them and all operations related to them (inc: loan repayment, rent payment) are exempt from any tax, fee or charge in favor of the State.

It is clarified, however, that in the event that the lessee company buys the leased property before the expiration of three years from the beginning of the lease, or the lessee transfers the rights and obligations arising from the leasing contract to a third party, or the property remains in the ownership of the leasing company due to non-payment of the agreed price or the latter transfers it to a third party, the exemption from the real estate transfer tax is revoked, which must be paid once.

 

The leasing contract comes with a series of advantages (tax and not only) for the company. The range and value of the specific advantages are undeniably a strong incentive to enter into lease contracts for a number of Greek businesses. In these, moreover, lies the success of the institution in our country. The leasing contract is presented in various forms and creates various legal (though of practical importance) concerns. About them see our next article.

Evdokia Kornilaki
Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July 23rd, 2023).

 

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.