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The SA’s shares are freely transferable: during its operation, during its liquidation stage, during its submission to collective proceedings. The admissibility of the free transfer of SA shares results from the principle of the free transfer – about which our previous article ( art . 41 §1 and on this explanatory memorandum of law 4548/2018). We have pointed out, however, that this principle is not applied in two cases – as regards SAs with shares not listed on a regulated market. We have already dealt with the first of these (: restricted shares – art . 43) ˙ these are those which are subject to statutory restrictions regarding their transfer. Here we will be concerned with the second, but equally interesting, case: the put and call options.

 

Concept & Content

Έννοια & Περιεχόμενο

It is, by law, possible (art. 44 of Law 4548/2018) to conclude a shareholders’ agreement, among themselves or with third parties, which provides the option to buy (: call option ) or sale (: put option ) of nominal shares.

With such an agreement (:option), the right is granted to the beneficiary to draw up on their own (“unilateral”) declaration another main contract with their bound-under a relevant obligation counterparty. The cooperation, that is, in this case, of the obligee is not required; this, moreover, is what differentiates the option agreement from the commonly known preliminary contract.

The option constitutes, respectively, a property right and a transfer right, which works as follows: The shareholder or a third party in whose favor the relevant right is found, can, as a result, proceed , alone, to buy or sell shares. Also, to acquire or transfer them. An agreement that grants option must be in place. The agreement must specify the shares it bounds; it must also deduce its object: the right to buy or sell them as well as the individual conditions. In order for the beneficiary to enter into the final contract of purchase or sale of the shares for which they have the option, their unilateral declaration to their bound/under the relevant obligation counterparty is sufficient. The latter (the obligor) is not entitled to deny the occurrence of the legal consequences of the beneficiary’s unilateral declaration: they have already provided them with the relevant authority.

The option agreement may involve the payment of consideration by the beneficiary to the obligee/obligor. The possible agreement of such a consideration sufficiently explains the reason why the purchase price of the shares may be higher than their value (see 4648/2014 Court of Appeal of Athens , CJEU, 2/2015, pp. 145 – 151).

Forms of Options

The agreement of the option can also refer to the content of the forms of restrictions of the shares, which we have already dealt with (art. 43). Among them (and according to the explanatory memorandum of Law 4548/2018 on Article 44) the obligation (: drag along ) or right agreements (: tag along ) of the minority to sell together with the majority shareholders. The restricted shares presuppose, according to the aforementioned, a statutory provision; the option agreement does not (:43 §2 para. c΄ and d΄).

Activation Time of the Option

The option agreement may be subject to a suspensive condition or term. In this case the relevant right (:option) will not be activated in the first place. It will be activated either as soon as the term is fulfilled (that is, the agreed future and uncertain event has occurred) or as soon as the agreed deadline has passed (see 4648/2014 Court of Appeal of Athens).

Registration of the Option Agreement

Such an agreement (in the context of which an option is granted) can be recorded in the shareholders’ book or, in the case of intangible shares, in the register, with the care of the contracting parties ( art . 44 §1) . As the registration of the relevant agreement is potential for the parties, the completion or non-completion of the registration does not affect the validity of the agreement. Through it, however, its transparency and “publicity” is achieved. It is, therefore, necessary in the vast majority of cases.

 

The Exercise of the Option

The option, as already pointed out, is exercised by a unilateral declaration of the beneficiary to the one bound/obligor (and not to the SA).

With the declaration to the obligor regarding the exercise of the right (CC 176), the agreed main contract is drawn up. In this case, the rights and obligations arising from it kick in (if, for example, it is a sale, the rights and obligations of 513 et seq., 534 et seq. of the Civil Code are activated; the buyer becomes the bearer of the rights and obligations that derived from the shares).

No specific form is required for this declaration of the beneficiary. This is normal, as a written contract is not mandatory for the valid transfer of shares either. The exercise, therefore, of the option can be done in writing or orally, explicitly or implicitly (see 4648/2014 Court of Appeal of Athens). However, the written exercise of the right is advisable (if not necessary – for proof purposes only).

In the event that the SA’s Board of Directors (or the person who keeps the shareholders’ register) confirms that the option has been duly exercised (: fulfillment, among other things, of the agreed conditions and formalities – including the payment of any price) it must register “immediately” the change of the shareholder in the book or register (art. 44 §1) . In fact, for this specific registration, cooperation of the parties to the transfer is not required (by express exception of what is required by art . 41). Also: the registration is neither dated nor signed by the transferring shareholder, the acquirer or their proxies (art. 41 §2, section b) .

This registration legitimizes the beneficiary vis-à-vis the company. Its realization (or not), however, does not affect the validity of the transfer.

 

The Bending of the Principle of the Free Transfer of Shares

The principle of free transfer of shares still applies even when an option agreement has been drawn up. In order to prevent the possibility of such (unnecessary for the holder of the option) transfer, a relevant clause is required in the option agreement. Specifically, as the law expressly provides, in the option agreement “…a clause may be set that until the option is exercised or amortized, no transfer of the shares may take place” ( art . 44 §2, section a)

However, even the existence of such a clause does not, in the first place, invalidate the expropriation deed (: transfer) between the obligor and the third party, in terms of the option agreement. Any exercise, therefore, of the option cannot reverse said transaction.

On the contrary, the above clause applies to third parties only if it is specifically noted in the shareholders’ book or in the relevant register of intangible shares. It is in the latter case that the so-called ” implementation ” of the prohibition of transfer takes place. Therefore, in case of non-recording of the clause prohibiting transfer or non-specific mention of it in the book or in the register of shareholders, any transfer of the shares by the obligor to a third party is valid. The holder of the option may, however, claim damages against their counterparty. Possibly, they may also be entitled to seek recourse against the third party from the provisions on tort or deception of creditors ( art . 914 et sec., 919 and 939 et sec. of the Civil Code); provided, however, that the third party was aware of the option agreement.

However, in case of specific mention of the specific clause in the book of shareholders (or register), any transfer of the shares by the obligor to a third party becomes invalid. It is, as is accepted, a nullity which the beneficiary of the option can assert (:relative nullity).

 

The Amortization Of The Option

The cases of amortization of the option are also of particular importance (see 4648/2014 Court of Appeal of Athens).

The option (it is assumed) must be exercised within a reasonable time. However, given the vagueness of the relevant concept (“reasonable time”), it is necessary for the contracting parties to agree, expressly, on a deadline or dissociative clause (after the expiration or, respectively, the fulfillment of which), the relevant right is extinguished.

The option may also be extinguished by subsequent contrary agreement of the parties (361 Civil Code). Also: in case of subsequent (express or implied) resignation of the beneficiary.

In addition, its abusive exercise or the weakening of the relevant right may lead to amortization of the relevant right (art. 281 of the Civil Code). Also, in case of contradictory behavior of the debtor: when, e.g., the owner of the shares has encumbered the shares with a pledge, they are not entitled to claim from the obligor to acquire them.

Finally, any unforeseeable change in circumstances can lead to the depreciation of the option, which makes the consequences of the exercise of the right of option extremely burdensome (art. 388 of the Civil Code).

 

Restrictions on the transfer of unlisted SA shares may be set by its articles of association (so we are talking about restricted shares) or by agreement between the obligor and the beneficiary. In the latter case (: option to buy or sell shares) no formula is required. However, the risks posed by the “informality” of this agreement are extremely important. It is precisely this fact that mandates the publication of the relevant agreement in the book or register of shareholders. And even more: the written, detailed, but especially careful delimitation of the rights and obligations of the parties involved. Also: of the individual parameters of their agreement.-

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July 31st, 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.

On the occasion of our previous article regarding the transfer of shares, we approached the particularly important principle of their free transfer (art. 41 §1 Law 4548/2018). A principle that does not apply, however, in the case of two categories of shares: (a) that of the reserved shares (art. 43) and (b) those for which there is an option to transfer or acquire them (art. 44). In the present article we will be concerned with the first ones.

 

Concept & Purpose of Issuance of Restricted Shares

Meaning

According to the law (: art. 43 law 4548/2018) restricted shares exist when statutory restrictions are placed on their transfer inter vivos, which ceases, for this reason, to be free. Transfers, which take place in violation of the relevant statutory prohibitions, are void (art. 43 §2 in fine ).

The articles of association may allow the issuance of restricted shares, the transfer of which depends on the approval (of the Board of Directors or the General Assembly) of the SA ( art . 43 §1). Furthermore, the articles of association must define the procedure, the conditions and the deadline, within which the SA approves the transfer or nominates a buyer. If, however, the specified deadline elapses, the transfer of the shares is free.

The articles of association may define the reasons for which the competent body is allowed to refuse the approval of the respective transfer of the restricted shares. In the absence of a relevant provision, the competent body acts at its own discretion. In any case, however, the discretion cannot be exercised by abuse of right ( art . 281 Civil Code).

Purpose of Publication

Through the issuance of restricted shares, the share balance of the SA is maintained. And so does the prevention of the entry into the SA, as shareholders, of unwanted third parties ( incl .: competitors or insolvent persons).

The control of the entry of new shareholders is of particular importance and value in the cases of family SAs and SAs with only a few shareholders. Maintaining their character and equity balances is, in the vast majority of cases, a vital feature for their continued operation.

The reserved shares are therefore used to serve the (corporate) interest of the SA on the one hand and the interest of the majority shareholders on the other – in particular, those who exercise (directly or indirectly) its management.

 

Establishment & Termination of Transfer Commitments

The issuance of restricted shares presupposes, as mentioned above, a relevant statutory provision ( art . 43 §1, section a΄). The relevant clause may have been established by the articles of association. The provision can bind the shares issued at the establishment of the SA but also those (or only those) that will result from future increases in its share capital.

It is, however, possible to establish this specific clause in a subsequent amendment to the statute. In the latter case, an increased quorum and majority of the General Assembly is required, which will take the relevant decision ( art . 130 §3 and 132 §2). The minority shareholders will be entitled, in this case, to request the redemption of their shares by the SA ( art . 45 §2, para. b’).

The articles of association may allow, simply, the issuance of restricted shares. The decision to issue them or not will then rest with the body that will be entitled to take the relevant decision.

It is also possible to abolish any statutory regulation regarding the restriction of shares. It is assumed that the time for which the commitment was intended has expired. Alternatively: decision of the General Assembly on the relevant statutory amendment, which is taken with an increased quorum and majority. In case of cancellation of the restriction, the principle of free transfer of the shares shall apply again.

 

Transfer Restrictions

As a basic limitation of the free transfer of shares, according to the aforementioned, the provision of approval by the competent body (: General Assembly or Board of Directors) is provided for. It is, however, possible to establish further statutory restrictions ( art . 43 §2). The relevant reference in the law is specified as indicative. However, it is important to note that (despite the poor wording of the law), the restrictions imposed are not allowed to make the transfer impossible. The limitations listed in §2 are the following:

Right of Preemption

The potential restrictions on the transfer of shares include: “…a) the impermissibility of the transfer, if the shares are not previously offered to the other shareholders or to some of them” (art. 43 §2, par. a’).

Based on the specific legislative regulation, the articles of association may establish, as a limitation, a right of preference in favor of the existing shareholders or some of them (right of first refusal). The shareholder who intends to transfer the shares is obliged, in this case, to first offer their shares to the already existing (or to specific) shareholders of the SA.

The respective statutory regulation is the one that will determine the content of the preemptive right as well as the procedure for exercising it (e.g. method of notifying the transferor, response deadline of existing shareholders).

The specific preemptive right should not be confused with the preemptive right in the share capital increase of the SA. The right of preference, in the latter case, consists of a right of the existing shareholders for preferential/original acquisition of newly issued shares – in the context of an increase in the SA’s share capital.

Indication Of The Acquirer From SA

Another restriction that can be set by the articles of association is the “…indication, on behalf of the company, of a shareholder or a third party who will acquire the shares, if the shareholder wishes to transfer them” (art. 43 §2, par. b).

The shareholder who wishes to transfer their shares communicates, in this specific context, their relative wish to the SA and/or the terms of transfer offered by a third party. The SA, in this case, can indicate another person, to whom, only, the shareholder is obliged to transfer their shares.

This specific restriction differs from the corresponding right of pre-emption as a person designated by the SA may be a third party to it, not just an existing shareholder. Also, in this particular case, the SA maintains a more active role, as it, through its competent bodies, is the one that indicates the specific shareholder, who will acquire the shares available for sale.

Tag Along Right

As a potential restriction, the condition according to which “…in order to approve the transfer of shares to a third party, the third party will undertake to acquire shares of other shareholders, which will be offered under the same conditions as the transfer is approved, or different conditions, according to the provisions of the statute” (art . 43 §2, para. c΄).

In this case, it is a right to co-transfer shares of the other shareholders who have not negotiated with the third party who wishes to acquire SA shares. This right is also called the tag along right. It aims to facilitate the exit of the minority, whose rights it ensures. Through this, any minority is protected in case it does not wish to be trapped in the SA with an unknown/unacceptable majority shareholder.

Drag Along Right

Finally, as a limitation, the condition under which “…in the event of a transfer of shares from a shareholder to a third party, the other shareholders will also be obliged to transfer the corresponding percentage of shares to the third party, in accordance with the provisions of the articles of association” (art. 43 §2 d’).

This specific provision establishes the drag along right. It refers to the case of an offer to buy all the shares or the majority package from a third party. If, in this case, the shareholders of a specific majority agree to the purchase (of the entire SA) from the third party, the other shareholders are obliged to (co)transfer to the latter their own shares as well. In fact, under the same terms and conditions that the majority agreed to.

This particular right serves the majority. Also, the completion of the purchase by the third party, who reasonably may not want the existence of a minority in the SA.

 

Obligation to Redeem Restricted Shares

The law establishes the possibility of foreseeing the obligation of the SA to redeem the reserved shares. In particular: “…the articles of association may provide that … if the company refuses to approve the transfer of shares or does not respond to the shareholder within the period provided for by the articles of association, it is obliged upon the request of the shareholder and within… 3 months from the submission to redeem the shares…” ( art . 43§3).

Despite the poor wording of the relevant regulation, it must be accepted that the option of redemption can be provided by statute for any intended transfer restriction in which the SA is involved. Thus, the possibility of being trapped in the SA of a shareholder who wants to leave it is avoided.

 

Cases of Death, Confiscation, Bankruptcy, Other Collective Foreclosure Proceedings

The restrictions on the transfer of the shares do not apply, basically, in case of death, confiscation, bankruptcy or submission of the shareholder to another collective process of foreclosure of their property (art. 43 §4).

The articles of association, however, may stipulate that in specific cases the shares are purchased by a person indicated by the SA (or by those of its shareholders who will exercise a preemptive right). The price to be paid will be determined by the competent court, through the process of “ex parte” proceedings.

The specific indication, on the part of the SA, must take place within an exclusive period of one month since (the SA) was informed of any of the specific events. It must also be notified, as the case may be, to the shareholder, the heir or legatee, the creditor, the trustee or the body of the other collective process.

The relevant provision serves the corporate interest and the other shareholders. The determination of the purchase price by the competent court is certain to significantly delay the completion of the relevant procedure. It would be desirable if the relevant statutory definition of it were jurisprudentially accepted.

 

Restrictions on Transfer of Bonds

The restrictions on the transfer of the shares can respectively be applied in the case of the bond loan. In particular, the law provides that the relevant application of these restrictions can be a decision of the body that decides on the issuance of a bond loan with nominal, convertible or exchangeable bonds. In fact, in case of transfer of bonds in violation of the restrictions that may be decided, this is invalid ( art . 43 §5).

 

The issuance of restricted shares, i.e. shares for which statutory restrictions are placed on their transfer, is related to the preservation of shareholder balances but also, to a significant extent, to the very existence of the SA. Experience shows that their eventual non-establishment can have disastrous results for the latter. Imperative, therefore (and not only desirable) is the careful establishment of the best, in each case, restrictions. Equally important, however, is the agreement, subject to conditions, to grant an option to transfer or acquire shares not listed on a regulated market. About this, however, see our next article.-

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July 24th, 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 our previous articles, we were looked into stocks. We dealt, specifically, with their meaning and value and the rights and obligations arising from them. We dealt with their issue as well as with their specific categories: preference and redeemable.

However, the transfer of shares and its extremely important parameters are of particular interest. This article is about them.

 

Transfer of Shares Due to Succession in Title

The shares, first of all, can be transferred (either by full or only partial ownership) due to succession in title (art. 41 of Law 4548/2018). The concept of succession in title includes all cases of transfer, except that of hereditary succession, which we will approach later.

The Principle of the Free Transfer of Shares

The principle of free transfer of SA shares is of major importance (art. 41 §1 and Memorandum to the law 4548/2018 on this). Based on it, the SA’s shares are freely transferable: during its operation, during its liquidation stage, during its submission to collective proceedings. It is not possible, in principle, to place restrictions on their free transfer.

On the basis of this principle, shares are marketable. This is how the financing of the SA. The shares’ transfer can result to the disinvestment on the part of the existing shareholders – as the return of their contributions is, in the first place, prohibited.

The cause of the (inter vivos) transfer of the shares may take place in various ways. Indicative: due to sale, parental benefit or donation.

The principle of free transfer of shares is applied in the cases of: (a) restricted shares (art. 43) and (b) those for which there is an option to transfer or acquire them (art. 44). About them: our next article.

The Transfer of Shares by Registration in the Book of Shareholders

The transfer of the (nominal-always) shares, which are not kept in accounting form (: the intangible shares, about which see below) is done by entry in the (compulsorily kept – art. 40 §2, section a) shareholders’ book. This entry shall be dated and signed by the transferring shareholder and the transferee or their proxies. Given the insufficiently kept, over time and in most cases, shareholder books, exceptions from the obligation to sign were established, and rightly so, when: (a) the company receives a copy of the share transfer agreement with the signatures of the parties or is informed of its preparation in another way – provided for by the articles of association, (b) the shareholder book is maintained electronically by a central securities depository, credit institution or by an investment firm.

When the transfer takes place, a new title is issued. Alternatively, the SA shall note on the title already issued the completed transfer as well as the details of the acquirer (name/surname, address/headquarters, profession and nationality – Art. 41 §2 and 40 §2). All this, of course, as long as the statute does not limit or exclude the issuance of securities (art. 40 §4).

The above procedure for the transfer of shares regulates, in reality, the legalization of the acquiring shareholder vis-à-vis the SA. The person who is registered in the shareholders’ book exercises rights and assumes obligations arising from the shareholding relationship. The transfer agreement, however, between the parties (the transferor and the acquiring shareholder) is binding on the parties and is not affected by this registration.

Regarding the transfer between old and new shareholder, the rules on registered securities apply. Therefore, only the agreement between them and the delivery of the title of the share is sufficient for the transfer of the share relationship to take place. In fact, in the event that the shareholding relationship is not incorporated into a security, the transfer takes place by assignment (art. 455 et seq. Civil Code, art. 470 Civil Code). It is desirable, however, with regard to shares not listed on an organized market, that a written contract for each transfer always be in place.

The Transfer of Intangible Shares

Regarding the issue of shares, we have already referred to the intangible ones: the shares, i.e., issued and kept in accounting form compulsorily for the SAs listed (and potentially unlisted) on a regulated market. We pointed out, there, that the case of intangible shares should not be confused with the case of non-issue of equity securities.

In derogation of what was mentioned above, the transfer of shares kept in accounting form (:immaterial shares) is done through securities accounts (art. 41 §3). The latter are kept in a central securities depository or by an intermediary (law 4569/2018).

The registration of the transfer of intangible shares is a condition of its validity vis-à-vis the company and also, between the transferor and the acquirer (art. 13§1 Law 4569/2018). However, it should be noted that it is possible, under certain conditions, to transfer shares – that are kept in accounting form – of listed companies outside the stock market as well.

 

Transfer Due to (Quasi) Universal Succession in Title

Shares (as well as the share relationship, considering its property character) can be inherited. In this case, the provisions of inheritance law apply. At the time of induction of the inheritance (1710 Civil Code) the hereditary succession on the shares takes place automatically. However, the provision of article 42 of Law 4548/2018 (which constitutes the transfer to the national legal order of Regulation 909/2014/EU) is the one that regulates the issue of legalization of heirs and legatees vis-à-vis the SA.

Inheritance With Registration in the Book of Shareholders

In order for the heir or legatee to be legitimized vis-à-vis the SA, it is required (art. 42) to be registered in the shareholders’ book mandatorily maintained by the SA. After the specific registration, the heir or legatee has the possibility to exercise their rights – assuming, of course, also any obligations – deriving from the shareholding relationship.

The registration takes place as soon as the documents proving the succession (e.g. inheritance certificate, court decision publishing a will, etc.) are presented to the issuing SA, or to the person who keeps the shareholders’ book.

Inheritance of Intangible Shares

Also in the case of intangible shares, the succession takes place at the time of induction of the inheritance. However, according to article 42 of Law 4548/2018, the successor (:heir) is legalized against the SA from the time of their registration in the register of the central securities depository or in the securities account of the registered intermediary.

In this case as well, the registration takes place as soon as the person with a legal interest presents the documents certifying the inheritance to the one who keeps the register or the securities account.

However, it is important to note that ” for securities held in a central securities depository or through an intermediary… law 5638/1932 may be applied proportionally, after a relevant agreement with the clients” (art. 13 §6 of Law 4569/2018). In the event, therefore, that a contractual term has been agreed on the basis of which, in the event of the death of a spouse in a joint account of intangible shares, the shares automatically pass to the surviving joint owners, then the aforementioned succession does not take place. We are talking, in this case, about the Joint Investment Account that provides its joint owners with the important benefits of depositing in a joint bank account.

 

Taxation of the Transfer of Shares

Taxation for the transfer of shares is regulated by articles 42 and 43 of the Civil Code (Law 4172/2013, as applicable after Law 4549/2018).

Specifically, any income resulting from the transfer of capital: (a) shares in a company not listed on a stock market, (b) shares or other securities not listed on a stock market (as long as the transferor participates in the company’s share capital with a percentage of at least 0, 5% and since the transferred shares have been acquired from 01.01.2009 onwards), is subject to personal income tax (art. 42 §1, par. a’ and b’ of the Tax Code).

As expressly defined, surplus value means the difference between the purchase price paid by the taxpayer and the sale price received (art. 42 §2 Income Tax Code).

Furthermore, the law determines the method of calculation of the purchase and sale price. It is noted, however, that if the acquisition price cannot be determined, it is considered zero.

Specifically:

(a) In the event that the transferred securities are listed on a stock market, the acquisition price and the sale price are determined by the transaction supporting documents, which are issued by the stockbroking company or the credit institution or “any entity that conducts transactions”.

(b) In the case of a transfer of unlisted securities, the sale price is determined based on the value of the equity of the company issuing the transferred securities at the time of the transfer or the price “or market value” stated in the transfer agreement, if this is higher.

(c) In addition, it is provided that the value on the basis of which the inheritance, gift or parental benefit tax was calculated or exempted from is to be taken as the acquisition price for securities acquired due to inheritance or charitable transfer (art. 42 §4 Income Tax Code).

The income obtained from capital gains from the transfer of shares is taxed at a rate of 15% (art. 43 of the Tax Code). A tax is imposed on the transfer of shares as a result of a parental benefit, as a gift or in the context of inheritance based on the respective scales that apply each time. Especially for parental benefit, there is a tax-free amount of €800,000 (art. 44§1 in fine, law 2961/2001) for all assets transferred as a parental benefit, while in terms of donation and inheritance, the value of the transferred assets is of paramount importance elements as well as the degree of kinship between transferor and acquirer.

 

Shares, as an asset, are freely transferable inter vivos by full or bare ownership only. The basis of transfer can be (more commonly) sale, parental benefit and donation. In any case, the optimal fiscal option should be carefully chosen. The shares, however, are also transferred mortis causa – in the context of inheritance. In order to be entitled to exercise their rights against the SA, the new owner needs to hand over their legalization documents. It is also necessary that they are registered in the book of shareholders of the issuing SA. We must, therefore, be particularly careful regarding the possession of the necessary, legalizing, documents as well as registration in the shareholders’ book. It should be noted, however, that the provisions on the free transfer of shares apply when there are no restrictions on the transfer of shares – when, i.e., the shares are not restricted. Regarding 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 (July 17th, 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 financing of the SA is a matter that always concerns its management and ownership. And when its self-financing turns out to be unfeasible, its external financing proves necessary. In the context of the latter (apart from the obvious- ie the banking lending) and the issuance of securities. In this context, we have already dealt with the issue of common and preferred shares. More attractive, however, are the redeemable shares– both for the company and its shareholders and for the investors themselves. Let’s try to approach the reason as well as the data around them.

 

Redeemable shares: Concept

Redeemable shares are those that provide the possibility of their redemption by the issuer SA (: callable shares), from their shareholder (: puttable shares) and/or from both (art. 39 of Law 4548/2018). They are issued as common or preferred with (or without) voting rights.

 

Redeemable shares: Basic function, purpose and advantages

The redeemable shares are basically a means of financing businesses. The individual terms of their issuance are particularly malleable; they are easily adapted to the needs of the business as well as the wishes of the investor.

The possibility (or, as the case may be, the obligation) of their redemption by the issuing company serves different needs: of its (old) shareholders, of the company and their owners:

In the case of their acquisition by declaration of the company, the company and the old shareholders preserve (and ensure) the pre-existing (and usually family) shareholding structure. Also: the equity balances.

In the case of their acquisition with a declaration of their owners, the disinvestment expectation/agreement is implemented according to the agreed terms and, in particular, the agreed time. The security of the contributor of the capital-holder of redeemable shares is achieved, to a significant extent, since the company itself is its counterparty and liable for performance. In order to further secure their position, further safeguards (eg personal guarantees and collateral from the other shareholders) cannot, of course, be excluded.

 

Their hybrid character

Their redeemability is what primarily gives redeemable shares their hybrid character. They present, as shares, equity characteristics. At the same time (and because of their redeemability) they present elements of debt – especially when they are deprived of the right to vote. They differ, however, from the cases of taking on debt, as their acquisition presupposes the existence of profits in the SA, a reduction of its capital or the issuance of new shares.

 

Issuance process

The issuance of the redeemable shares requires a statutory provision (art. 39 §1 paragraph a’). However, they are issued, exclusively, in the context of (regular or extraordinary) increase of the share capital – and not during the establishment of the SA. It is possible to limit or exclude the pre-emptive right of the old shareholders. At the same time, however, if any rights of preferred shareholders are affected, approval of their assembly is required.

It is also possible to convert existing common shares into redeemable shares. A relevant statutory provision is also required as well as a decision of the General Assembly – with an increased quorum and majority (39 §6). The principle of equal treatment of shareholders must be observed when choosing common shares, which will be redeemable. It should be noted, however, that this particular case does not serve the financing of the SA, but the disinvestment of its shareholders, subject to conditions.

 

Redemption conditions and procedure

The possibility, basic terms, conditions and procedure of redemption of redeemable shares must be clearly defined in the articles of association. As mentioned above, there is great flexibility for their specialization by the competent statutory body that decides on their issuance. The specific body is the one that will decide, therefore, the issue of redeemable (common or preferred) shares with (or without) voting rights (25 §1) as well as the individual terms that concern them – especially with regard to the terms of the redemption.

 

Redemption conditions

The redemption of the specific shares may be linked to the passage of a specific period of time. However, it is possible to relate their redemption to future and uncertain events (eg: non-admission of the company to a regulated market).

It is also possible to threaten the activation of their buyout as a means of preventing anti-corporate actions and ousting illegal shareholders (eg: breach of fiduciary duty or conduct of competitive acts).

With regard, in particular, to the acquisition price, it is possible that it be fixed or dependent on certain pre-defined parameters (e.g. EBITDA).

For redeemable shares, the redemption conditions set by the law (art.39 §3) include the existence of (initial or introduced with an amendment) statutory provision, the full payment of the shares to be redeemed, the observance of specific redemption rules and the observance of publicity formalities. In case of non-compliance with any of the legal conditions (apart from the compliance with the publicity formalities), it will be null and void.

Regarding, in particular, the statutory provision, it is possible for it to be initial or introduced later on – it can even take place with the decision of the General Assembly, which will decide to increase the share capital by issuing redeemable shares.

 

Financing

Particularly important conditions for carrying out the acquisition are those concerning its financing. Provided (art. 39 §3 c’) amounts that can be distributed exist (according to art. 159 and 160). The corporate property which is returned to the shareholder of the redeemable shares must be paid from the reserves or profits of the SA.

The acquisition in question, alternatively, can be financed from the proceeds of issue of new shares, which is carried out for this specific (and only) purpose. The share capital, in this case, will remain unchanged: a share capital increase will take place, which will cover the “gap” of the corresponding decrease that will result from the redemption of the redeemable shares.

As a second alternative to the financing of the acquisition is through amounts that are released after a reduction of the capital (according to art. 29 et seq.): the amounts in question will not be returned to the beneficial shareholders but will be used to finance the acquisition.

 

Creation of a reserve

According to the law (art. 39 §3 d’), it is necessary to create a reserve equal to the nominal value of the shares identified as redeemable. However, this specific condition applies, exclusively, in the event that the acquisition is carried out using distributable amounts. It does not apply, on the contrary, when the acquisition takes place “…using the product of a new issue, which was carried out for the purpose of this acquisition, or amounts released by reducing the capital” (art. 39 §3 par. d’ in fine Law 4548/2018).

 

Possible premium

The additional amount agreed to be paid to the shareholders, beyond the amount of the redemption price, must be covered by profits that can be distributed (art. 159 and 160). Alternatively, this amount can be paid either by capital reduction (art. 29 et seq.) or from a reserve, which, however, differs from the aforementioned reserve of par. d’ of the same article.

 

Publicity

The last condition of the law is the publication of the redemption (art. 39 §3 para. f) which, however, has a declaratory nature. Failure to do so does not affect the validity of the redemption.

 

The declaration for the redemption

The redemption declaration, as already mentioned, can be submitted either by the SA or by the shareholder (art. 39 §1).

In the event that the declaration is made by the shareholder, it brings about its results, under conditions (art. 39 §4). Initially, the conditions stipulated, if any, in the articles of association must be met. However, the SA, in addition, should have available (at the time the SA receives the shareholder’s declaration for redemption) sufficient (to satisfy the declaration) amounts from those that are allowed to be distributed (according to no. 159 and 160). Otherwise, the shareholder’s declaration has no effect (art. 39 §4 in fine).

As long as the declaration for the redemption takes place and the redemption process is completed with the payment of the redemption price, its legal consequences occur. The owner of the redeemable shares loses, in this case, their shareholder status and the redeemed shares return to the SA (art. 39 §5). Completion of the acquisition process, therefore, will not result in a reduction of the SA’s share capital.

 

The use of the institution (and individual options) of redeemable shares is yet another arrow in the company’s quiver to achieve its financing. Further: The use of the option to convert existing shares into redeemable ones is a means of return to the shareholders (part or all) of their participation in the SA’s share capital.

The optimal utilization of the multiple possibilities of the specific institution depends (and must depend) on the current data, the needs and choices of the company; mainly: of the majority shareholders.

Do with that, therefore, as you may.-

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July 10th, 2022).

 

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

We have already addressed the shares of the SA, their operation and value. Also: the rights and obligations arising from them. We have also addressed their distinction into common, nominal and intangible shares, the obligation (or not) to issue equity securities as well as their under/over par issue. In the present article we will address an (on many aspects) interesting class of shares: the preference shares.

 

Preference shares: Concept and purpose

Preference shares (art. 38 of Law 4548/2018) are those which (in deviation from the principle of equality governing shares – art. 36 §1), provide more property rights and privileges to their owners.

Deposits in banks and investments in banking products are no longer a profitable investment. Safe places (which would justify zero or negative interest rates) do not exist. Different – even more “aggressive” – alternatives have been investigated for a long time. Among them: and participation in the SA’s share capital – through preference shares.

The SA, on the other hand, is able to offer, through the preference shares, the appropriate incentives in order to attract capital. It achieves, in this way, its financing, without the obligation to return capital and (as a rule) interest – as, under normal conditions – in the case of borrowing, it would have to do.

 

The preference shares and the benefits for the SA

Even if the agreed “consideration” for the holder of preference shares is the interest, there are significant differences from a financing of the same amount in the form of a simple or bond loan. Among them: the payment of interest to the shareholder-holder of preference shares is for the SA an expense (deductible from the income), in contrast to the profits it distributes.

Preference shares expand the SA’s capital base, improve its financial ratios and creditworthiness. The credit risk of the next financier will be (objectively) more reduced: the capital base and financial ratios of the SA will be improved. An inevitable consequence will be the easier sourcing of (new and cheaper) financing – based on the logic of reducing credit risk. The SA will become, for the same reasons, more attractive to potential new investors.

 

The procedure for issuing preference shares

The issuance of preference shares requires an initial (or consequential) statutory provision. The relevant decision (if it is an amendment to the statutes) is taken by the General Assembly with the usual quorum and majority. However, in the case of the issuance of preference shares through the increase of the SA’s share capital, a relevant decision of the General Assembly is required: it is taken with an increased quorum and majority (art. 130 §§3 and 4 and art. 132 §2). And let’s not forget that the specific decisions (amendment of the articles of association and decision to increase the capital) can coexist in the same General Assembly (art. 4 §5). In case shareholders of preference shares preexist, the approval decision of their assembly must be taken beforehand, and so must their exercise of their right of preference (art. 25 §§3 and 4 and 25 §1).

It is also possible to convert common shares into preference shares – without increasing the share capital of the SA – subject to the principle of equal treatment of shareholders (art. 38 §7). And in this case, however, an increased quorum and majority of the General Assembly that will take the relevant decision is required.

 

The perks

The partial or total receiving of the distributed dividend before the holders of the common shares.

The preferential contribution to the beneficiaries of the shares from the share capital reduction product or the liquidation product, including their participation in the premium amounts, which may have been paid.

The receiving of a cumulative dividend (and as such we mean the dividends of previous fiscal years which were not paid to the preferred shareholders due to the non-distribution of profits).

The receiving of a fixed dividend or only a partial participation in the company’s profits.

The receiving of interest, either with a parallel provision of the condition of non-participation in the company’s profits for a specific period of time or without a relevant provision.

The right to vote

Preference shares may be issued with (or without) voting rights. In the case of their issuance without the right to vote, they are not counted in the quorum and majority for the decision of the General Assembly. Their nominal value is taken into account, however, regarding the exercise of minority rights. There is no limit to the number of non-voting preference shares that SA can issue. Let’s just remember that it is, in every case, necessary to have at least one common share in the SA (art. 37 §2).

It is also possible to issue preference shares with limited voting rights (only for certain matters specified in the articles of association of AE – art. 37 §4).

 

The convertible preference shares

Preference shares may be issued as convertible into common or preference shares of another category (art. 38 §3), on the basis of a relevant (initial or consequential) statutory provision. The articles of association must define the terms and deadlines as well as the obligation (or not) of the conversion. The conversion right can be foreseen, for the first time, with the decision of the General Assembly on the issue of the preference shares (art. 38 §3). In the event the relevant decision follows their issuing, an increased quorum and majority is required both from the General Assembly of the holders of common shares and from that of the privileged shareholders (art. 38 §8 paragraphs a and b).

 

Removal or limitation of privileges

The complete abolition of the privileges of preference shares leads to their conversion into ordinary shares. Their limitation takes place in the event that one of the most privileges is removed or limited as well as when new privileges are issued. In each such case, a decision of the special meeting of the privileged shareholders taken with an increased quorum and majority is required.

 

The ” Way Out” of the investment

The liquidity of any investment is an important factor for choosing to make it in the first place. And when the acquisition of preference shares is chosen as an investment, it is possible to make it more attractive by simultaneously issuing them as redeemable: as an additional, i.e., “privilege”. In this context, the time and method of liquidation of the investment will be determined in advance, as will, moreover, the total-final benefit of the investor.

 

Issuance of preference shares is often an extremely interesting option for both the SA and the investor. The first (issuance) attracts investment funds, strengthens the company’s capital base, increases its credit rating, renders it more attractive to prospective investors. Owning preference shares, on the other hand, is an alternative (and often very interesting) investment option. The addition (or not) of voting rights can satisfy individual needs and choices of the persons involved. In fact, in the event that the preference shares are agreed to be redeemable, the scheme can become more attractive, both for existing and new shareholders. But about them, see our article to follow.

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July 3rd, 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 dealt with shares, their fanctions and value. Also: with the rights and obligations deriving from the shareholding relationship.

At present, we will be concerned with their issuance. We will be concerned, in particular, with common, registered and intangible shares, the obligation (or not) to issue equity securities as well as their under/over par issues.

 

The Common Shares

The shares issued by an SA belong, according to the law (art. 37 law 4548/18), to the category of common shares – provided they do not fall into any other category (: preferred, redeemable and amortized – according to the Memorandum to the Law on the specific article).

The SA is required to have at least one common share (art. 37 §2). This is a provision that was first introduced by Law 4548/2018. Under the regime that prevailed, on the contrary, there were quantitative restrictions, concerning the issuance of preferred and redeemable shares (art. 4 Law 876/1979). These restrictions were, however, abolished with the entry into force of Law 4548/2018.

Common shares provide all the rights provided by law (art. 37 §3). With the exception, of course, of those that concern specific classes of shares. In any case, however, they provide the right to vote as well as the right to participate in the profits and the product of the liquidation of the company.

 

The Issue Price of the Shares

In our previous article we mentioned, among other things, the nominal value of the share (€0.04-€100). Its issue price, on the contrary, is, in principle, freely set by the SA. It is not permissible, however (art. 35 §2), to issue shares at a price lower than par (at a price, i.e., that falls short of their nominal value). This is reasonable, as, in the absence of the relevant provision, the entire share capital would not be paid.

It is possible, on the other hand, to issue shares at a price greater than their nominal value: their issue, i.e., at a premium (art. 35 §3). In some cases, in fact, the premium issue of shares is assessed as necessary. In some cases of increase, e.g., of the share capital, the shareholder is appropriate to pay consideration for the goodwill acquired by the SA. Moreover, in this way, the principle of equal treatment of shareholders is preserved.

The premium amounts constitute an element of the net position of the SA (art. 26 §1, par. a1 and examples Par. B΄). Although they are part of the “paid-in capital”, they should not, however, be confused with the share capital: they constitute supplementary capital, the existence of which establishes the obligation to pay capital accumulation tax (113/2009 Legal Council of the State, 1044/03.02.2014 Ministerial Decision).

The premium amounts cannot be allocated for the payment of dividends or percentages (art. 35 §3 Law 4548/2018). It is possible, however, for them (a) to be capitalized or (b) to be set off to offset losses of the SA, following a decision of the General Assembly (art. 35 §3).

The possibility of offsetting the premium with the amortization of losses is ancillary (Memorandum to the Law on 49§4 Law 4587/2018, which amended §3 of Article 35 Law 4548/2018). This means that the above amount can be used for the amortization of losses, as long as the SA does not have reserves or other funds that can, in the first place, be used for the above purpose.

In the case of partial payment of the share capital, as long as the issue of shares at a premium is foreseen, the difference is paid in full, once, upon payment of the first installment (art. 21 §3, para. b΄, sub. b΄).

 

Issuance of Shares: Registered Shares & Abolition of Shares

The SA is obliged to issue, exclusively, registered shares (art. 40 §1). The unregistered shares have already been abolished (from 1.1.2020).

The reasons for the abolition of unregistered shares are several (see Memorandum to the Law 4548/2018). To begin with: the abolition of unregistered shares is aimed at regulatory simplification, as now uniform rules apply to the shares of the SA; there is no longer any distinction between registered and unregistered shares.

After all, the specific distinction and the advantage of unregistered shares in terms of their easier transfer had already been relativized. With regard to listed shares, the same, uniform, provisions for the transfer of registered shares (the overwhelming majority at the time) and unregistered (about ten at the time of the law’s enactment) applied (and before the enactment of Law 4548/2018). Also, the national legal order contained rules of law, and in particular, rules of tax law, which required the drawing up of a document also for the transfer of unregistered shares.

Furthermore, the abolition of unregistered shares is the most effective measure and the simplest means of avoiding the risks that they entail precisely because of their anonymity. The institutions of the European Union, through their work, have, for a long time, asked the member states to ensure that unregistered shares will not be a means of abusive practices (e.g. money laundering).

It should be noted that Greece has incorporated into the national legal order Directive 2015/849/EU on the prevention of the use of the financial system for the laundering of proceeds from illegal activities or for the financing of terrorism, with Law 4557/2018. Further reference to this law is beyond the scope of this article. It is pointed out, however, that the parallel processing of the above-mentioned law and the new law on SAs played an important role in the choice of the simplest measure of the abolition of unregistered shares.

Obligation to Issue Equity Securities

The importance of stocks is significant on many levels. The term share means, among other things, the title in which the shareholding relationship is incorporated.

In particular, the SA is obliged to issue and deliver to the shareholders share certificates (art. 40 §3). In fact, under the current regime, only definitive and not temporary equity securities are issued. The Board of Directors is in charge of issuing and delivering the shares. The latter (BoD) acts within the limits of possible within the stricter limits set by the statute of the SA, if such are in place. Accordingly, a claim is made to the SA for the issuance and delivery of the shares in favor of the shareholders.

It is also expressly provided that equity securities may be single or multiple. Multiple equity securities incorporate more equity relationships and, correspondingly, more equity rights. This very fact, however, may make their marketability more difficult. However, the law expressly establishes the obligation of the SA to replace any existing multiple securities with new ones, which incorporate a smaller number of shares – provided there is a relevant application.

Issuance of shares performs a legitimizing role for the shareholders on the one hand and for the SA on the other. However, as we already pointed out in our previous article, their publication is merely declarative and not constitutive in nature. That is, it is a prior obligation of the establishment of the shareholding relationship.

The articles of association may exclude or limit the obligation of the SA to issue shares (art. 40 §4, section a’). In this case, the relevant statutory clause defines the method of proof of shareholder status (art. 40 §4, section b). In the event of its absence, the proof of shareholder status is then based on the details of the shareholders’ book. Additionally, if the shareholders’ book leaves doubt or has not been properly updated, based on documents held by the shareholder (art. 40 §4 in fine).

 

The Shareholders’ Book

Keeping the shareholders’ book constitutes an obligation of the SA in any case (art. 40 §2 section a’). The law, in fact, explicitly numbers the details of the shareholders that this book must include. These are: (a) their name or company name, (b) their address or registered office, (c) their profession, (d) their nationality, (e) the number of shares they own and (f) the category of these shares (art. 40 §2 sec. b’ and c’). Also, (g) the details of their (possible) transfer (art. 41 §2).

The law does not provide for a specific procedure for keeping the shareholders’ book. However, it provides the possibility, through a statutory provision, for it to be kept electronically. Alternatively: from the central securities depository, from a credit institution or from an investment service firm, which have the right to hold financial instruments. As long as there is no relevant statutory provision, the rule of it being kept in written is in place.

The shareholders’ book provides major facilities in terms of proof of one’s shareholder status. It carries the evidentiary power of commercial books (art. 444 no. 1 of the Code of Civil Procedure). In fact, its evidentiary importance is highlighted by the law itself: vis-à-vis the company, the person registered in the book in question is considered to be a shareholder (art. 40 par. 2 in fine). Clearly, however, its significance is intertwined with its proper updating, otherwise it has no evidential power.

Any non- (correct) updating by the SA of the shareholders’ book entails adverse legal consequences. First of all, this is a tax violation, which entails a fine. At the same time, not (correctly) complying with it may establish civil liability of the SA towards third parties. Possibly, also personal liability of the members of the Board of Directors, who are charged with its update (71 Civil Code).

 

Issuance of Shares: Intangible Shares

The case for non-issuance of shares should not be confused with the case of intangible shares. In the latter case there are shares, but these are shares that are issued and kept in an accounting form.

The obligation to dematerialize the shares had already become mandatory for SAs listed on a regulated market, with Law 2396/1996. On the basis of dematerialization, shares are not on paper. On the contrary, they are registered in an accounting form and are tracked in an electronic file, in a register of securities (e.g. in the Dematerialized Securities System, in the case of the Athens Stock Exchange). The purpose of this specific obligation is security and the reduction of transactional costs as well as the faster and simpler transfer of these shares.

The issuance of intangible shares is already possible for non-listed SAs.

The shares of SAs can be kept in accounting form, not only after dematerialization, but also after immobilization (for both cases: art. 40 §5 Law 4548/2018 and Regulation (EU) 909/2014). The term immobilization refers to the act of gathering material securities in a central securities depository, so that all the transfers that will follow can be carried out with an accounting entry. The SA’s articles of association must provide for the more specific method of issuing and maintaining its shares in a central securities depository, out of the above two.

In the case of shares that have been issued in accounting form, a shareholder vis-à-vis the company is considered (art. 40 §6) not only the person registered in the register of the central securities depository, but also the person identified as such through the registered intermediaries.

 

Shares are, as we have already pointed out, the most common and important securities of those issued by any SA. Of these, the more important and necessary: ​​the common shares. Other distinctions/declarations and provisions of the law (e.g. registered and intangible shares, obligation (or not) to issue equity securities as well as their under/over-par issue) make it easier to understand their operation, according to the law, and, of course, their optimal business utilization. Our next article is also about this.-

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (June 26th, 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.