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

 

Regulation

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

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

 

Purpose

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

 

Conditions of Application

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

(a) Issuance of Securities

In general

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

Anonymous and Nominal Shares

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

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

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

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

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

(b) Theft, loss or destruction of stock

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

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

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

 

Procedure for Declaring the Share Title Invalid

Procedure & Jurisdiction

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

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

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

Persons With a Justifiable Cause to Initiate the Procedure

Standing to Bring an Action

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

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

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

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

Defendant to the Proceedings

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

Third Party Proceedings

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

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

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

Preparatory phase

Invitation for Declaration

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

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

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

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

Suspensory Effect

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

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

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

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

Issue of Decision

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

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

Legal Consequences of Declaration

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

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

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

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

Main Procedure: Declaring the title invalid

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

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

Issuance of Decision and Legal Consequences

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

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

 

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

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

Stavros Koumentakis
Managing Partner

 

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

 

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

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

 

Regulation

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

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

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

 

Usufruct

Concept & Content

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

Recommendation

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

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

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

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

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

Exercise of Voting Rights of the Shares in Usufruct

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

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

Is a different agreement possible?

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

It is therefore possible:

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

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

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

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

Exercise of Other Non-Property Rights

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

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

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

Increase in share capital

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

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

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

 

Obligations & Liability of Beneficiary of the Usufruct

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

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

 

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

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

Stavros Koumentakis
Managing Partner

 

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

 

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

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

 

Regulation

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

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

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

 

Pledge

Concept & Content

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

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

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

Setting up the Pledge

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

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

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

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

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

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

 

Exercise of Voting Rights While there is a Pledge on Shares

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

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

Is a contrary agreement possible?

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

It is therefore possible for:

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

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

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

 

Exercise of Other Non-Property Rights

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

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

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

 

Increase in share capital

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

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

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

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

 

Obligations & Liability of the Pledgee

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

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

 

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

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

Stavros Koumentakis
Managing Partner

 

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

 

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

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

 

Regulation

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

 

Purpose

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

 

The Principle Of The Indivisible Character of Shares

Content

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

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

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

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

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

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

Exceptions

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

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

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

 

Co-ownership of Shares

Concept & Content

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

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

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

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

Management of Co-owned Shares

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

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

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

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

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

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

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

Designation of a Common Representative

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

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

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

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

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

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

Declarations of Intent to Shareholders

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

Distribution of Common Shares

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

 

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

Stavros Koumentakis
Managing Partner

 

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

 

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

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

 

Content

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

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

 

The Lien Prohibition

Field of application

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

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

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

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

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

Purpose

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

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

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

Exceptions

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

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

Legal Consequences

Unlawful Pledge & Liability of Board Members

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

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

Legal Pledge By Exception

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

 

The Acquisition of Shares From a Controlled Company

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

Subjective Scope

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

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

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

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

Objective Field of Application

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

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

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

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

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

Purpose

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

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

Exceptions

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

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

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

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

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

Legal Consequences

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

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

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

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

 

 

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

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

Stavros Koumentakis
Managing Partner

 

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

 

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

We explored the concept of shares in our previous article. We saw, there, that the share denotes (among other things) the share relationship. We found that the shareholding status is acquired, originally, by taking at least one share during the founding of the SA or, in the context of a share capital increase, by issuing new shares (and in fact before the payment of the share capital). In the present article we will look into the prohibition of the original acquisition of the same shares by the SA: both during the establishment and during the increase of its share capital.

 

Meaning

The prohibition of original acquisition of own shares by the SA is provided for in art. 48 law 4548/2018. This is a similar regulation to that of art. 15b of the previous law 2190/1920.

The specific prohibition concerns the original acquisition by the SA of its own shares: (a) either through its founders upon its formation (b) or through the members of the Board of Directors in any increase in its share capital (c) or through a third (substitute) person, acting in the company’s name and on its behalf. Following are specific cases, which we will study in more detail.

 

Purpose

The prohibition of the original acquisition of own shares aims, first of all, at the actual payment of the SA’s share capital and at the preservation of its integrity. Any original acquisition by the SA of own shares through (obviously) the corporate property, would mean the coincidence of the status of creditor and debtor in the same person (depreciation cause-453 section a of the Civil Code). Also, the obligation to return the contribution paid. In other words: virtual payment.

The relative prohibition, therefore, aims to avoid the creation of an S.A. with (even if partially) virtual equity.

Through the preservation of corporate property, the satisfaction of corporate creditors’ claims is ensured, as far as possible. In addition, the shareholders (obviously the minority) are also protected by avoiding changes in the shareholding balances.

 

Cases of Prohibition (Scope of Application)

Acquisition of own shares during the establishment of the SA

During the formation of the SA, its founders undertake the full coverage of the initial share capital. They therefore acquire shares of the established SA. They are obliged, at the same time, to pay contributions of a value corresponding, at least, to the nominal value of the shares they undertake. This payment by the founders is intended to fulfill the obligation of the minimum share capital required for the establishment of the SA and the formation of the corporate property. It would not be possible, therefore, to allow the initial share capital to be covered by the SA itself (as it is not – art. 48 §1).

Such a (theoretical) possibility would create a double paradox. The SA, initially, would become a founder-shareholder of its legal entity/self -absurd. Also: the SA would end up being its own debtor – also absurd. Moreover, the coexistence of the properties of the debtor of the value of the shares taken up (here: SA) and the creditor of this value in the same person (the same SA) is not possible. On the contrary, it is a reason for the amortization of the debt due to confusion (453 section 1 of the Civil Code).

Any coverage, therefore, (even of a part) of the initial share capital by the SA, would only result in a virtual undertaking of its own shares. It would not entail, that is, the contribution of a new asset to its corporate property.

The prohibition of the original acquisition of own shares extends (exactly for the same reasons – Art. 48 §1) to the original acquisition of bonds convertible into shares. A special provision for the original acquisition of the same share certificates is found in article 57 §1 of Law 4548/2018.

Acquisition of own shares in an increase of the SA’s share capital

The ban on the original acquisition of own shares by the SA during the increase of its share capital is basically addressed to the members of its Board of Directors. Reasonably, because, through them, it is (theoretically possible) for the SA to acquire its own shares. At the same time, this relative prohibition, (among others) on the increase of the share capital, serves the same purposes as the corresponding prohibition during the establishment of the SA. In fact, it represents a more pressing need.

The increase of the share capital (with the exception of the nominal increase) is one of the main forms of financing of the SA. Through this, the inflow of new financial assets into the SA and the increase of its corporate assets is achieved. The specific purpose (of the financing of the SA) cannot be achieved, of course, by the acquisition/payment of the newly issued shares with resources of the SA. In case of, e.g., non-exercise by the existing shareholders of the pre-emptive right – combined with (non) payment of the necessary, new, contributions, the formed, new, share capital of the SA would be fictitious. In this way, there would be no influx of new financial assets.

It should also be noted that the relevant provision of Article 48 of Law 4548/2018 also covers the case of acquisition of own shares for the purpose of their subsequent offer by the SA to third parties.

Acquisition of own shares through a third party

It goes without saying that the original acquisition of own shares by a third party, acting in the name and on behalf of the SA-direct representative, is prohibited (art. 48 §1).

And so is the original acquisition of own shares by a third party, in their name but on behalf of the SA (indirect agent). Likewise, both during the establishment and during the increase of the SA’s share capital (art. 48 §2).

Such a (prohibited) tactic would lead to the acquisition of shares by a third party, albeit an agent, with the SA’s financial means. The third party, in this case, would be obliged to transfer the shares to the SA by virtue of the provisions on the mandate (in particular art. 719 of the Civil Code).

 

Possible Exemption

The prohibition of the original acquisition of own shares is admitted to be subject to one, and only, exception – in case of an increase in its share capital: in this case, the SA is entitled to take over, with its free reserves or profits, a percentage of the newly issued shares. This percentage must correspond to the total of its shares, which it acquired in a derivative manner and which are intended for distribution to its staff. Or to the staff of businesses connected to it.

 

Consequences (Penalties) of Violation of the Prohibition

Regarding the invalidity of the share capital coverage

The violation of the ban on the acquisition of own shares by the SA both during the establishment of the SA and during the increase of its share capital does not result, in an opinion we share, the invalidity of the coverage. Otherwise, there would be insecurity in transactions. The establishment or, respectively, the increase of the share capital, with the SA’s own resources, are considered valid. The SA acquires, as a consequence, its own shares for the first time.

Of course, it is supported by a small part of the legal theory that the relevant violation results in the invalidity of the coverage of the share capital (art. 174 Civil Code).

On the original, ultimately, acquisition of own shares, art. 49 §7 of Law 4548/2018: the SA is obliged, within one year from the acquisition of its shares, to sell them.

In the event, however, that the above-mentioned sale does not take place within the above-mentioned time, the own shares will eventually be canceled through a corresponding reduction of the SA’s share capital.

While, however, the SA retains its own shares, the rights deriving from them are, of course, suspended (in analogy to art. 50). Among them: the right to represent and vote at the General Assemblies – the shares, after all, are not taken into account for the formation of a quorum.

The liability (and exemption) of the persons involved

According to the aforementioned, there is no provision for invalidity of the own shares illegally (originally) acquired. In the event of a violation, however, of the relevant prohibition, a special responsibility is established for those involved (founders – during the formation, members of the Board of Directors – during the increase and any third parties): These persons are burdened with the obligation to pay the value of the shares taken up. The value is determined by their issue price (and not by their nominal value – art. 48 §3). If more than one person is involved, they are jointly and severally liable (art. 914, 926 of the Civil Code).

Corresponding liability is also created for third parties acting as indirect agents: they are considered to have taken over the disputed shares for their own account and are personally responsible for paying their value (art. 48 §2). At the same time, however, for reasons of guaranteeing the payment, in this case, joint and several liability is established with the indirect agent, founders or members of the Board of Directors (Civil Code 914,926).

Not distinguishing the law as to the required degree of culpability, it is inferred that the persons involved are responsible for any fault upon taking over own shares.

However, it is also possible to establish further criminal (art. 177 §3) and civil liability (art. 102 §1) of the members of the Board of Directors due to a violation of the relative prohibition of article 48.

The liable persons may be released from the responsibility of paying the value of the shares. A necessary condition is the proof of a lack of contributory culpability on their part.

However, in the case of more than one person at fault, if one of them is absolved, the others are still jointly and severally liable (914, 926 Civil Code).

 

Therefore, as a rule, the acquisition of own shares by the SA is prohibited both during the establishment and in the context of the increase of its share capital. The relevant violation is not without (significant) sanctions for the persons involved. But what happens in the case of the derivative acquisition (e.g. through purchase or donation) of own shares by the SA? Is it also prohibited or conditionally permitted? Regarding them, see our article to follow.

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 28th, 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 referred to the right of the minority to request the redemption of its shares by the SA (Article 45 of Law 4548/2018). We were also concerned with the corresponding right of the minority to redeem its shares from the majority shareholder (Article 46 of Law 4548/2018).

Here, we will be concerned with the right of the majority shareholder to claim the redemption of the minority shares. This right is regulated in Article 47 of Law 4548/2018, in a similar manner to the previous Article 49c of Law 2190/1920.

 

Meaning

The right of the majority shareholder (95%+ of the share capital) to redeem the shares of the minority shareholders (up to 5% of the share capital) constitutes a right to exclude the minority shareholders from the SA, against a consideration (: “squeeze out” or “freeze out”). This is the reverse case of the right of the minority to buy out its shares from the majority shareholder, which we have already analyzed.

The shares are compulsorily acquired by the majority shareholder (:95%+ of the share capital) in case of success of the relevant court proceedings; the latter, in fact, will also owe the consideration/price that will be determined by the court.

 

Purpose

The specific right of redemption primarily protects the interests of the majority shareholder. It is not necessary to plead a specific reason on the part of the latter: they are completely irrelevant in the present case. Specific minority/majority correlations and the judicial diagnosis of the statutory conditions are sufficient.

By exercising this right, the majority shareholder acquires full control of the SA, eliminating the (micro) minority shareholders. Literally run by “one man”. Through the exercise of this particular right the majority succeeds in disengaging itself from insignificant percentages but, often, annoying minorities. On the other hand, minority shareholders, contrary to article 46, do not choose their exit: they are driven out in exchange of an, at least, reasonable consideration.

The concentration, however, of all the shares in one (natural or legal) person is likely to be problematic on a substantive and, in particular, legal level; however, it may also, under certain conditions, only be beneficial and/or redemptive. In any case: the sole or majority shareholder of the SA has the right to choose. They retain, in any case, the right to allow the entry of new shareholders of their choice.

 

Public Offer (?)

The right of the majority shareholder to claim the redemption of minority shares also applies to listed companies. Subject, however (art. 47 §1), to the provisions and procedure regarding the submission of a public proposal for the purchase of securities (art. 27 Law 3461/2006). The latter, as more specialized, should be considered to have priority of application. Moreover, their parallel application is excluded as they require the fulfillment of different conditions. In the present article, however, we will exclusively limit ourselves to the conditions of article 47 – to non-listed SAs.

 

Majority & Minority Percentages

The 95%+ percentage of the majority

The configuration of the 95%+ rate

The holder of the shareholder redemption right should collect, by ownership, a percentage of at least 95% of the total (taken up and not, necessarily, paid up) share capital of the SA. The type of shares owned is immaterial (e.g. common or preferred). The aforementioned percentage is required at the time of exercising the relevant right.

However, it should be noted that the collection of said, increased percentage by the majority should have taken place at a time subsequent to the founding of the SA. This particular legislative option seems reasonable. The shareholder who acquires the above increased percentage (95%+) at the time of establishment has, from the beginning, accepted the equity balances of the SA: their “coexistence”, i.e., with the minority. It is therefore not recognized as a right of redemption worthy of protection.

It is accepted, however, that this right is also exercised in the event that the majority shareholder held, at the time of establishment, a percentage greater than 95%, then it was reduced below this by transferring their shares and, again, exceeded it.

The calculation of 95%+

Contrary to the right of the minority to redeem its shares from the majority shareholder (art. 46), there is no possibility of including the shares of other shareholders in the case we are considering. Even if it is related businesses of the majority or close family members. This follows from the letter of the law and is more protective of the minority interpretation. The proportional application of the provision for inclusion of Article 46 is, however, supported by part of the legal theory.

Finally, voting rights based on extra-corporate agreements, under the control of the majority, are also evaluated as indifferent.

The (up to) 5% percentage of minorities

As regards the (up to) 5% percentage of the share capital that must be held by the minority, it is not required that it be exclusively owned by one shareholder. However, in the context of the specific regulation and procedure – as long as there are more minority shareholders, the majority is obliged to exercise the right of redemption against all of them. The possibility of buying specific, only and at their choice, minority shares must be excluded.

It is noted, however, that the (up to) 5% percentage of the minority, which can be acquired, also includes the shares of the affiliated companies and the relatives of the majority. (This, of course, is the case in the event that, according to a view that is correct in our opinion, the inclusion of the shares of the specific persons in those of the majority is not accepted).

 

Exercise Deadline

The legally legitimized majority shareholder has the right to legally pursue the redemption of the minority shares within an exclusive depreciation period of five years (article 47 § 1, sub. b’). The specific deadline begins with the acquisition by them of the ownership of shares that exceed 95% of the SA’s share capital. Any statutory provision to the contrary regarding the deadline is void, given the mandatory nature of the specific provision.

With the lapse of the specific five years, the majority shareholder permanently loses the possibility to request the redemption of the minority shares.

 

The Exercise of the Redemption Right

The specific redemption right is exercised upon application of the majority shareholder before the Single Member Court of First Instance of the seat of the SA. The latter is decided during the process of ‘ex parte’ proceedings (739 et sec. of the Civil Code).

The redemption request concerns, as already pointed out, all the minority shares. However, given the ‘ex parte’ proceedings, the trial is not against the minorities. The latter become part of the trial only if they intervene.

The majority shareholder is obliged to submit a (non-binding for the court) expert report. The report is drawn up by two certified auditors or an audit firm. The purpose of this report is to create an image of the company’s assets and value based on data that the SA’s Board of Directors must provide (article 47 § 2).

If the application is granted, the court determines the consideration of the redemption. The consideration must be fair and reasonable.

The judicial decision that is issued is diagnostic in terms of the part that concerns the diagnosis of the relevant right. It applies to all (erga omnes). It therefore also binds the minorities who did not choose to participate in the trial by intervening. The binding force of the court decision that will be issued extends until the right of redemption and the amount of the consideration are established.

 

The Payment of Compensation

If the application of the majority shareholder is accepted, the mandatory deposit of the consideration in a credit institution follows (art. 47 §3). The deposit is made exclusively in cash, so that the consideration is fixed and unchanging. With this regulation, the legislator aims to prevent any phenomenon of insolvency of the majority. The legal nature of the deposit agreement in question is, in the holding’s view, that of irregular deposit. The majority submits, with the mandatory filing, the court decision and a copy of the expert report.

By depositing the cash, a genuine contract is created in favor of a third party; in favor of the minority, i.e., shareholders. The latter acquire, thus, a direct claim against the credit institution for payment of the amount of the price attributable to them. Their claim is time-barred after twenty years (articles 249 and 268 of the Civil Code). The credit institution, before making a payment, is obliged to verify the legalization of the minority.

The deposit of the consideration by the majority cannot be revoked. Necessary, therefore, is for the sum to be deposited after the finality of the court decision.

Any refusal to accept the consideration by the minority shareholders does not prevent the acquisition. Their only right is the judicial challenge of the decision regarding the amount of the consideration.

The credit institution may deposit to the Deposit and Loan Fund the part of the consideration not sought within six months from the date of deposit.

 

The Public Declaration

A constitutive condition for the exercise of the majority shareholder’s right to redeem the minority shares is the public declaration of their will to do so. This is, in particular, a unilateral exercise of their right. The content of this declaration is explicitly defined in the law and must include (article 47§4):

(a) the name of the SA, the details of the majority and its percentage in the SA,

(b) the elements and content of the court decision to establish the conditions for exercising the right of redemption and determining the consideration,

(c) the details of the credit institution, where the consideration was deposited. Also, any conditions for its collection. Finally, it should clearly mention the possibility of the credit institution to deposit the consideration to the Deposit and Loan Fund.

The legal results of the declaration come with its publication to the Business Registry (article 47 §5). This publication is essentially a notification of the addressable statement.

With this publication, the transfer of the minority shares to the majority shareholder takes place automatically. A prerequisite is the registration of the registered shares in the shareholders’ book (40 §2). However, with regard to intangible shares, their transfer takes place through securities accounts (41 §3).

The physical act of delivery of any existing equity securities nor the conclusion of any contract between the parties involved is therefore not required.

The right to collect the pre-deposited consideration from the minority shareholders depends on the publication of the above statement. In any case, delivery of their shares, if any, precedes collection. The transfer of the shares, however, occurs independently of collection.

 

Individual Notification

In the event that the details of the minority shareholders are known to the majority, it is possible to bypass the public declaration process. The majority reserves the right, in this case, to make personal and separate notifications through a bailiff or by sending a registered letter (article 47 § 6).

Contrary to the public declaration, the publication of the notices in the Business Registry is not, in the case of individual notices, mandatory. The transfer of the shares takes place after the last notification, which must not be more than fifteen days after the first notification. In the case of sending a registered letter, the time of transmission is considered the time of sending and not the time of receipt.

 

Execution of the Decision

The execution of the decision and, as a consequence, the transfer of the shares is not hindered by any exercise of remedies, a request for revocation or reform or a third-party appeal against the former. However, in this case, any compensation claim is not excluded (art. 47 §7).

 

The right of the majority shareholder of an SA (owner of shares of 95%+ of its share capital) for forced acquisition of the shares of the minorities, it is obvious that the interests of the former are served. The interests of the company itself are served and promoted as well: it is freed from internal quarrels and is led to the achievement of the corporate goal “in one spirit”. And finally, the minority’s own interests are served; by owning such a minimal percentage in the SA’s share capital (<5%), they enjoy absolutely limited rights and protection from the law. Their departure from the SA, therefore, for a worthy consideration, could not (as a rule) be considered detrimental to them.

However, it is not only the shareholders who acquire shares of the SA; the SA itself is also entitled to acquire its own. About them, however, see our article to follow.-

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 21st, 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.