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We were concerned, in a previous article, with specific aspects of the SA’s share capital: its coverage , payment and certification . Also, its increase and decrease. We have already established that the SA’s share capital (needs to) be protected and safeguarded – due to its nature and purpose. This is why, in principle, there is in place a prohibition of returning to the shareholders their contributions – before the dissolution and (completion of) its liquidation. It is, however, permissible to return to the shareholders all or part of the nominal value of their shares during the operation of the SA, through the amortization of its share capital (Article 32 of Law 4548/2018). It is a (largely) unknown, multi-level , but beneficial option given by the law. The familiarization with its basic parameters is useful for this purpose.

Content And Nature Of Amortization

The (partial or total) amortization of the SA’s share capital allows its shareholders to collect from it part or all of the nominal value of their shares. And even while the SA is operating.

The institution of amortization does not in any way interfere with the above-mentioned prohibition of returning the contributions of the shareholders: the amounts paid to the shareholders correspond numerically to the nominal value of their contributions, but they are not identical with them. The specific, paid, amounts do not come from the pledged corporate property. They come, on the contrary, from a special reserve or from profits of the SA. For this reason, after all, capital amortization is an indication of its financial strength.

The amortization can also take place through a partial or total exemption of the beneficial shareholders from the obligation to pay the amount of the capital that they have covered, but have not yet paid (article 32 §3 in fine).

The legal nature of amortization has been the subject of theoretical debates. In the most correct view (and indeed helpful to its better understanding), amortization constitutes a peculiar distribution of profits.

Through amortization, the SA pays the beneficial shareholders free property in “consideration” for the amortization of two specific future claims against it. Specifically, the claims: (a) to the distribution of a minimum dividend and (b) to the return of the contribution as liquidation product (article 32 §4).

The distinction from the reduction of share capital

Amortization of capital is not a reduction of capital. This finding, in fact, is so important that the legislator itself deemed it appropriate to make a relevant explicit note (Article 32 §2) .

During the amortization of the share capital, as already mentioned, free property is paid to the beneficial shareholders. On the other hand, through share capital reduction, part of the SA’s reserved amount is released, corresponding to its share capital.

In the case, therefore, of amortization, the share capital of the SA remains unchanged, as a mathematical (: numerical) quantity. Therefore, no amendment of the articles of association is carried out nor (much more) the approval of the administration is required. The provisions for the protection of creditors on the occasion of the reduction of the SA’s share capital do not apply here.

The Amortization Process

Competent body

The competent body to decide the amortization of capital is the General Assembly (Article 32 §1). Its decision will only concern a specific, imminent, amortization (not any future ones), whose more specific parameters it will explicitly specify (full/partial amortization, sources of financing, etc.).

The General Assembly decides on the amortization, at first, with an increased quorum and majority. However, as long as there is a relevant (initial or consequential) statutory provision, the General Assembly can decide on capital amortization by simple quorum and majority. However, in the case of the (subsequent) amendment of the statute, the decision of the General Assembly regarding the amendment requires an increased quorum and a majority.

Content of Amortization Decision

As already mentioned, the decision of the General Assembly determines the more specific conditions of the amortization; it determines – among others: (a) The shares that are to be amortized (on the basis of the principle of equal treatment of the shareholders). (b) The amount of the nominal value per share – as it will be formed. (c) The methods of amortization. (d) The sources of funding. (e) The time of carrying out the amortization. Regarding, in particular, the methods of amortization and the sources of its financing, it decides on the following:

Methods of amortization

Amortization can be total (by paying, i.e., the entire nominal value of all the shares) or partial (by paying the entire nominal value of part of the shares or part of the nominal value of all the shares).

Funding sources

Funding for amortization can come (Article 32 §3):

(a) From Special Reserves:

The SA may proceed with the formation of special reserves in order to finance future amortization. The formation of the specific reserves may be provided for by the articles of association or by a decision of the General Assembly.

It is also possible that the SA will use its free reserves to finance the amortization. In this case, in principle, a decision of the ordinary General Assembly (which decides by simple, i.e., quorum and majority) is required. In the case of a statutory provision, regarding a different use of said reserves, it is necessary to amend it.

(b) From Free Distributable Amounts (Net Profits):

The SA can also use amounts that are allowed to be distributed (according to articles 159 and 160 of Law 4548/2018) to finance the amortization. Specifically: net profits resulting from the deduction of the regular reserve and the payment of the minimum dividend. Also: profits that have accumulated, due to their non-distribution, during the previous fiscal years.

Approval of More Classes of Shareholders

In an SA there may be more categories of shareholders. With the amortization of the capital, the interests/rights of some of them may be affected. The validity of the amortization decision will then depend on the approval of the shareholders who make it up.

Said approval is granted at a special meeting of the specific category of shareholders, which decides with an increased quorum and majority (Article 32 §5). For the convening of the specific, special, General Assembly as well as the terms and conditions for decision-making by it, the relevant provisions for the General Assembly of Shareholders apply (Article 32 §6) .

Publicity of the Amortization Decision

Capital amortization is of interest to those who do business with the SA as well as any prospective shareholders. It is therefore submitted to publicity formalities (Article 32 §1 in fine ). As the amortization does not require an amendment of the articles of association nor its approval by the administration, it is accepted that its publicity is simply declarative (and not constituent) in nature.

Amortized Shares

In case of amortization, the shares corresponding to the nominal value paid to their bearers are called “amortized”. In other words, it is about the “Usufruct Shares” – based on older terminology (as the Recitals of Law 4548/2018 clarify). However, this specific condition should not be confused with the right of usufruct, which is established on shares.

If shares are redeemed by an SA that issues equity securities, it is advisable to replace them with new ones with the indication: “amortized shares”.

Results of Capital amortization

As we have already pointed out, amortization does not constitute, literally, a refund of contributions. Therefore, unlike the reduction, its implementation does not result in the abolition of the shareholding relationship. It changes, however, the rights that this relationship produces.

Specifically, the holder of amortized shares retains their shareholder status and rights; with the exception of two: (a) the right to the minimum dividend and (b) the right to the proceeds of liquidation. Correspondingly, both, to the amortized nominal value of his shares.

In other words: for the unamortized part of the nominal value of their shares, the beneficial shareholders still retain, proportionally, the aforementioned two claims/rights.

The holders of amortized shares are entitled to any subsequent dividend, which may be distributed – in excess of the minimum. At the same time, in the event that there is a surplus after the satisfaction of the non-depreciated shares from the liquidation product, the depreciated shares also participate in its distribution.

Usefulness Of amortization

The SA’s capital amortization can prove to be particularly and on many levels beneficial. Indicative: it is possible to contribute to the return of liquidity to shareholders who need it. It is possible to work in the direction of redistributing profits among shareholders (since holders of amortized shares will not have access to the minimum dividend attributable to them) – but without differentiating voting rights and disturbing equity balances. It is also possible to operate in the direction of minimizing the investment risk and maximizing the investment benefit as the investor-shareholder can receive, even immediately, part or all of the capital invested in the SA. Finally, it can be used for tax purposes or in the context of tax planning.

The amortization of the share capital of the SA is an institution that is not widely known – even to those of us who are supposed to be experts (lawyers, accountants, tax experts, notaries, financial managers, consultants, etc.) on SA-related issues. Therefore, it is not utilized to the extent it should be. It is therefore up to all of us (those involved in the field of SAs – of course also entrepreneurs) to “revisit” the amortization of equity capital and take advantage of the related opportunities and possibilities.

And there are many!

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (June 5th, 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 our previous article we dealt with the concept of the reduction of share capital and its distinctions; in our next article with the procedure to be followed, its techniques and conditions. Here we will be concerned with the issue of reduction from a critical, slightly different, point of view: that of the protection of creditors. Also, the (legal) results and its (in)efficiency.

Creditor Protection

Field of application

The protective provisions for creditors are basically for cases of actual reduction—that is, when the released corporate property is to be paid out to shareholders. They also concern the cases where the reduction of the capital is done by (total or partial) exemption of the shareholders from the obligation to pay share capital, which was undertaken but did not take place in the end (Article 30 §4 Law 4548/18 ) .

Content Of Protection

The creditors of SAs have one, only, way to protect themselves in case of an actual reduction of its share capital – provided, of course, they learn about it: the creation of dykes regarding the payment to the shareholders of the released capital.

Specifically, as long as the relevant conditions are met, a claim is made by each shareholder, against the SA, for the payment of the product of the reduction attributable to them. This payment, however, cannot take place before the deadline for submission of objections by the creditors has passed without the latter submitting any objections, or (if such objections are submitted) after the provisions of the law have been complied with.

Objections of Creditors with Overdue Debts

As follows from the regulation of the law (article 30 §1), creditors whose claims became overdue before the publication of the decision of the SA to reduce its share capital are protected (article 29 §4 law 4548/2018 – see our previous article). But it is argued (and rightly so) that those whose claims became overdue by the time of the relevant payment to shareholders are also protected.

Therefore, it is not possible for any payment to take place to the shareholders of the SA from a possible reduction of its share capital, before the expiry of the deadline within which the company’s creditors have the right to submit their relevant objections; the most important: before the claims of the creditors who will submit such are fully paid or even settled. With this specific choice, the legislator: (a) limits, to reasonable levels, the range of protected claims (b) foresees the possibility of settlement – and not only the payment – of overdue claims.

However, the specific arrangement seems to be undemanding to involuntary creditors (those, e.g., who were damaged by tort). The latter will probably not have the resources and/or the knowledge to monitor the SA’s actions and/or raise objections in a timely manner. But one could argue that, at least in part, they are protected by the provisions on the minimum share capital limit as well as by their right to take action against the guilty natural persons.

The Submission of Objections

Method of Submission and Content of Objections

There is no legislative provision regarding the procedure to be followed for submitting the above objections by creditors, their standardization and/or any minimum content. It is preferable, however, for reasons of proof, that their submission takes place in writing. Even better: with an extrajudicial letter, so that there is no question of proof – especially as regards the content and the deadline for their submission. Especially, in terms of content, it is important that they mention (and prove) the due date of the claims presented as well as the time when they became due.

Time to File Objections

The specific objections of the creditors should be submitted to the SA within a period of forty (40) days (instead of 60 under the previous law) from the publication of the corporate decision to reduce the share capital (Article 29 §4 Law 4548/2018 – see our previous article) . As the starting point of the specific deadline, we should consider the date of its publication on the website of the Business Registry. (Article 12 of Law 4548/2018) and not on the company’s website.

Objections of Creditors of Undue Claims

Creditors, however, of the SA with undue claims are also protected from the consequences of the reduction of its share capital (Article 30 § 2) . They, too, are entitled to submit objections to the company against making payments of released corporate property – due to a reduction in its share capital. It is enough that the satisfaction of their demands is indeed put at risk.

The submission of the objections of the specific creditors should take place within thirty (30) days from the publication of the decision to reduce its share capital. Regarding the procedure and content of their submission, the same applies, respectively, as we already mentioned immediately above.

In the event that objections are submitted by the creditors with undue claims, the SA is entitled to pay them off beforehand, provide them with sufficient collateral or a combination of those two options. Any disputes will, out of necessity, be resolved judicially.

The Judicial Resolution of Objections

According to the law: “the court shall rule on the validity or otherwise of the objections of the creditors of non- due claims…including those concerning the adequacy of the collateral offered by the company” (Article 30 §3, Section a).

The letter of the law seems to capture only the claims of creditors holding claims that are not due. However, unfounded claims may also be those which are presented, e.g., as overdue – but without them actually being overdue. Such demands (made in bad faith) may be intended, simply, to frustrate the completion of the process of reducing the SA’s share capital. It is supported, and rightly so, that the proportional application (also in this case) of the judicial procedure concerning the objections of creditors of undue objections should apply.

Competent Court And Procedure

The competent court for the resolution of the specific disputes is the Single-Member Court of First Instance of the seat of the SA; through non-contentious procedures.

During the adjudication of the relevant application of the SA, it is possible for the creditors who submitted their objections to intervene and object.

The Judicial Ruling

The competent court decides on the merits or not of the creditors’ objections. It is possible that the creditors with non-due claims can prove that making the payments in view of the remaining corporate assets (after making the reduction – taking into account any securities they already have) jeopardizes the satisfaction of their claims. The decision that will be issued, in this case, will allow the payment of the released amounts due to the reduction, on the basis of meeting conditions or providing sufficient collateral that it determines.

It is not required, however, that the insurances are granted by the SA itself. It is possible (also for) third parties to provide them (e.g. the shareholders). The specific third parties are, in fact, entitled to intervene in the relevant trial, so that it becomes possible for the court to order the provision of the securities in question on their part.

In case of objections from several creditors, one decision is issued for all of them, in order to avoid contradictory decisions. It is possible, at least theoretically, for there to be additional, pending, but timely, submitted objections. In this case, the decision that has been issued can (and should) be reformed so that the payments to the shareholders become permissible.

The Legal Results

Early Payment

In case the SA makes payments of released corporate property to the shareholders without complying with the conditions of the law, the relevant payments are invalid. This is a relative nullity in favor of the creditors of the SA, as specified above.

In the case of invalidity of the aforementioned payments, the shareholders must return the amount they collected to the SA, in accordance with the provisions of unjust enrichment. In fact, the relevant claim of the SA against the shareholders can be exercised by the aforementioned creditors.

The law does not establish a special liability of the Board of Directors in case of invalid payment. It may, however, be classified as a tortious liability of its members and/or the shareholders who benefited (according, e.g., to the provisions on the fraud of creditors).

It is, of course, accepted that the aforementioned invalidity of early payments is curable. It can, in particular, be cured if the above-mentioned period of forty days has passed. Provided, that is, no objections are raised. In the event that such are submitted, a remedy occurs, if after the payments: (a) overdue receivables are paid or settled, (b) non-overdue receivables are prepaid or sufficient insurances are provided or finally, in case of a non-consensual solution, the terms of the issued judicial ruling.

The Decision on the Reduction

Given what was mentioned above, it appears that the objections concern the payment of the released corporate property. On the contrary, the reduction decision is not affected by them. Its validity starts from the observance of the publicity formalities.

However, in the case of the actual reduction, the claim of the shareholders for the collection of its product presupposes the observance of the protective provisions for creditors.

On the contrary, in the case of a nominal reduction, from the publication of the decision, the new nominal value of the shares applies. Any pending replacement of old titles with new ones is not of relevance.

It is a given that SA’s creditors (with overdue or non-due claims) need protection in the event of a reduction in its share capital. It would not be possible for the legislator not to provide it to them. But the protection is, on a practical level, controversial. Which lender will spend even a part of their time in the search for the possibility that their debtor-SA has proceeded to reduce its share capital (and its return to the shareholders) in order to fraud them? However, given that this is the only means provided to them by the law, the creditor of the SA must: be, i.e., constantly alert.-

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 29th, 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 the concept and distinctions of equity capital. But for its implementation we need planning, preparation and, of course, a “road map”. It is precisely these that will concern us here, together with the techniques and conditions of reduction. The rights and protection of lenders will be the subject of our next article.

Equity Reduction Techniques

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

Reduction of the Nominal Value of Shares

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

Cancellation of Shares

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

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

Consolidation of Shares

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

Capital Reduction Conditions & Procedure

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

Competent body

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

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

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

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

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

The Invitation to Convene the General Assembly

Content

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

Purpose

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

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

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

Legal consequences of violation

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

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

The Content of the Decision of the General Assembly on Reduction

Purpose of Reduction and Method of Implementation

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

Capital Reduction In Kind

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

Amendment of Articles of Association

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

Minimum Reduction Limit of the Share Capital

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

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

Means of “Blocking out” Shareholders(?)

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

Approval of More Classes of Shareholders

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

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

Publicity of the Reduction Decision

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

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

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 15th, 2022).

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

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

Share Capital Reduction Distinctions

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

Actual & Nominal Reduction

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

Actual Reduction

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

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

Nominal Reduction

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

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

Optional & Mandatory Reduction

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

Optional Reduction

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

Mandatory Reduction

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

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

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

Uniform & Uneven Reduction

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

Uniform Reduction

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

Uneven Reduction

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

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

Reduction By Payment Of Cash & Capital Reduction In Kind

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

Reduction With Cash Payment

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

Capital Reduction In Kind

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

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

Special Ways of Reducing Share Capital

Reduction By Payment In Kind

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

The previous regime

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

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

The current regime

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

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

Reduction for the Purpose of the Formation of a Special Reserve

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

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

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

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 8th, 2022).

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

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

Concept & Right Holders

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

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

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

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

Legal Nature & Transferability

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

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

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

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

Second Degree Pre-emption

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

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

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

Invitation to Exercise the Right

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

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

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

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

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

Deadline for the Exercise

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

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

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

Non-Exercise of the Pre-emptive Right

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

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

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

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

Stavros Koumentakis
Managing Partner

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

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