Koumentakis

Tag: ανώνυμες εταιρείες

  • The securities issued by the SA (also) as a means of financing it

    The securities issued by the SA (also) as a means of financing it

    An obvious, as well as necessary, condition for the achievement of the (corporate) objects of the SA is its financing. It may prove possible for the SA to finance itself-through its business activity and/or its reserves. And though often unfeasible, external financing is a safe alternative. Among the sources of the latter, in addition to the most obvious and common (:bank lending), is the issuance of securities. About them, as a foretaste, the present article. In more detail, for the individual securities and possibilities, see our articles to follow.

     

    Types of Securities Issued

    The SA is entitled to issue specific securities (: art. 33 §1 n. 4548/2018). The relevant list is in principle, and according to the Memorandum to the Law, restrictive (:“numerus clausus”). The types of securities, which can be issued by SA, are those listed below:

    Shares

    Their concept is important on so many levels!

    A share means, first of all, a part of the share capital. The latter (: share capital ) of the SA is divided into equal, such, shares. The sum of the nominal value of the individual shares/shares constitutes the share capital.

    A share also means the shareholder’s right, the shareholding, i.e., relationship.

    In addition, it also means the title -the security, i.e., in which the share right is incorporated, if the SA issues shares.

    Shares are regulated in articles 34 to 55 of Law 4548/2018.

    Bonds

    The bond loan issued by the SA is divided into bonds (art. 59 §1 a’ law 4548/2018). More specifically: the amount of the bond loan is divided into equal parts, each of which constitutes the nominal value of the bond, in which it is incorporated. Bonds can be nominal or anonymous. It is possible to issue a single bond for a bond loan.

    Bonds are regulated in articles 59 to 74 of Law 4548/2018.

    Warrants

    These are also securities issued by the SA. They provide the transferable right to their beneficiaries (: option) to acquire, with just a declaration on their part, shares of the issuer for a pre-agreed price. This statement must be addressed to the SA within a (pre)determined deadline.

    Warrants are regulated in articles 56 to 58 of Law 4548/2018.

    Founders’ Shares

    They are distinguished into ordinary (Article 75) and extraordinary (Article 76).

    The first (:ordinary) are granted to founders of the SA, as a reward for services rendered during its formation. These securities have no nominal value and do not grant the right to participate in the management of SA nor in the product of its liquidation. However, they provide the right to withdraw up to ¼ of the net profits, after deducting the amounts for the formation of the regular reserve and the distribution of the first dividend.

    The extraordinary founders’ shares, on the other hand, constitute consideration for the granting to the company, during its establishment or its operation, of specific objects (not money). These objects, however, do not constitute contributions in kind and their value does not represent part of the share capital.

    The founders’ shares are regulated in articles 75 and 76 of Law 4548/2018.

    Other(?) Securities

    The law (art. 33) provides the possibility for the SA to issue, in addition to the above, other securities – which may be provided by special provisions. However, other securities, different from the above – ones that are not provided for by special legislation – cannot be issued.

    It is argued, however, that the quoted principle of numerus clausus does not apply in an absolute manner: the SA can proceed to issue different securities or to issue their individual categories. The free transfer of property rights deriving from them is also possible.

    The individual classes of securities may lead to new forms (:hybrids), which combine characteristics of several, e.g., shares and bonds. Such examples are bonds convertible into shares as well as redeemable shares (art . 71 & 39 respectively).

     

    Possibility of Issuing More Classes of Securities

    The law (art. 33 §2) allows the SA to issue securities of individual categories – however, within the context of the decisions of its competent bodies and the law. In the case of shares, for example, such categories are preference and redeemable.

    At the same time, shares of the same “type”, e.g. the preference shares, may be distinguished in more categories – depending on the privilege they provide.

    Furthermore, the SA may issue securities of the same category in consecutive, chronological, series. This issue of them may result in the different nominal value of the shares of each series. Shares of different series, however, are not necessarily required to be issued at different points in time.

     

    Ability to Connect More Securities

    The law on SAs (art. 33 §3) introduces an innovative possibility: that of connecting several types or classes of securities (stapling). As pointed out in the Memorandum to the Law, on the specific provision, this is a practice known in the international markets.

    This practice can take place in case of simultaneous issuance of several types or classes of shares. If this condition is met, it is possible to stipulate in the conditions of issuance of these securities (e.g. in the articles of association for shares or in the bond issuance program for bonds) that: “…the acquisition of a security of a type or category is only permitted with the condition of simultaneous acquisition of a certain number of issued securities of another type or another category”.

    At the same time, in the terms of issue of the securities in question, it may also be provided that the linked securities may be transferred or encumbered only jointly. The obligation, in fact, of common disposition, can be provided for a certain time or until the fulfillment of a certain condition. However, it can also be provided for the entire duration of the SA. This obligation to share the securities may reduce their marketability and ultimately make their transfer more difficult. In particular, if it is set without a time limit or under the fulfillment of a condition.

    This particular practice “…allows for a relaxation of the closed number principle” (see Memorandum to the Law on Article 33). This does not mean, however, that the exercise of this practice creates a new kind of title. It creates, on the contrary, beneficiaries of different titles, in the person of whom different qualities co-exist vis-à-vis the SA.

    It is possible, for example, for someone to become a shareholder and a creditor of the SA at the same time. This will be the case when the link is for stocks and bonds. In this case, however, there may be conflicting interests in the specific beneficiary.

    Such conflicts of interest appear, above all, in times of financial difficulty. During these periods, shareholders are likely to resort to entering into high-risk investments. They may also decide on distributions or the payment of additional dividends in favor of themselves. This practice has the effect of reducing the amounts available for the SA itself and the bondholders. Therefore, the operator of linked securities will be asked, each time, to choose the interests that they will attempt to satisfy.

    The (Non?) Possibility of Separate Disposal of Securities Rights

    The law (art. 33, §§4 & 5) maintains the principle, in the first place, of the indivisible security. This means that the rights to the securities can only be disposed of in their entirety. A security, therefore, cannot be broken down into individual rights, subject to the provisions on partnership, pledge and usufruct.

    However, the above rule is not strictly followed. Exceptionally, the possibility of separate transfer of property rights deriving from the security is provided. Specifically: “…claims to withdraw profits, interest or debts, as well as other independent property rights arising from the securities are freely transferable”. This specific possibility, which also existed under the previous law, does not, however, cover the management rights of the SA (e.g. the right to vote).

    The Explanatory Report of Law 4587/2018 -which amended §5- lists among the other independent property rights, indicatively, the preference right , the right to the product of the capital reduction or amortization and the right to the liquidation product.

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

    However, this prediction has been criticized. This criticism is based on the fact that the articles of association or the terms of issuance of the other securities may, in this way, interfere and set barriers in the decisions concerning the property of the holder of the security. Also, in the creation of an insecurity regime in transactions. And this is because it is possible for the holder of the security to transfer rights without even having the relevant right.

     

    SA may issue more classes of securities, utilizing the facilitations granted to it by law. Despite the fact that the law refers to their limited number, it is nevertheless possible to create and exploit their hybrids – securities with characteristics of more categories. In any case: the possibilities provided by the law for SAs are multiple and can be utilized in the direction of satisfying the corporate interest and its individual (financial and other) needs. It is up to them (the SAs) and their advisors to choose the best; also: to design them (in the optimal way).

    Regarding those topics, however, see our articles to follow.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (June 12th, 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.

  • Reduction of Share Capital: Ineffective Protection of Creditors

    Reduction of Share Capital: Ineffective Protection of Creditors

    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.

  • Violations by members of the SA Board of Directors

    Violations by members of the SA Board of Directors

    Today we are focusing on Article 177 of Law 4548/2018 on (criminal) “offenses by board members”, which aims, among other things, to safeguard the company’s capital and the interests of creditors.

    The provision in question criminalizes five different behaviors with a common cohesive element being the status of the perpetrator: any (even non-executive) board member. We categorize the behaviors into two sections:

    (a) The first section (§§ 1, 2 & 5) includes: (aa) the primary obligation to draw up and approve essentially accurate, non-misleading (see our related article of 17.03.2022) and by the law, in terms of their content, financial or consolidated statements of the company, management reports (which are not included in the financial statements) and any other annual report required by law and (ab) the secondary prohibition of distribution of profits or other benefits to shareholders of the company or a third party, in cases where the primary (under aa ) duty of veracity, accuracy and compliance with the law is not respected, especially when the statements in question have not been drawn up, etc.

    (b) The second section (§§ 3 & 4) includes: (ba) the prohibition of the knowing acquisition of redeemable shares or of causing the acquisition by the company of its own shares or shares of its parent company or other titles of its parent company, in violation of the law ( art . 39, 48, 49, 52 & 57) but also (bb) the prohibition of granting an advance, loan or guarantee either by charging the company, with the aim of acquiring its shares by a third party, or by charging its subsidiary, in order for a third party to acquire shares of its parent company, in violation of the law (art. 51).

    Any member of the Board of Directors who commits any of the above offenses (whether of the first or the second section) is severely punished: with imprisonment (up to 5 years) and with a fine from 10,000 to 100,000 euros.

    We consider it important to underline the evaluative asymmetry (now antinomy) which is found in this case between SAs on the one hand and Limited Liability Companies (art . 60 n. 3190/1955) and Private Capital Companies (art. 119 n. 4072/2012) on the other:

    the essentially similar acts of the first section (aa, ab), in the case of the SA are punished and even most severely, while in the cases of the LLC and the PPC they are not punished even in the least – they were misdemeanors which were abolished in their entirety.

    by no means are we insinuating a preference towards LLCs and PPCs, where, in the end, the provisions of the common Criminal Code apply.

    Nor do we give in to the temptations of an unconditional criminal intervention in the other corporate forms or an unjustified repeal of art. 177: it constitutes our moral and political defeat to comply (or not) with the law simply out of fear.

    The legislator, however, must be consistent (: not to send contradictory messages), fair (: to apply, in this case, the principle of equality) and alert (: to realize when it is skewed): otherwise, it negates the reason for the existence of the provisions that establishes and proves ineffective and unfair in regulating such a complex phenomenon as entrepreneurship.

    George Karanikolas
    Senior Associate

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 22nd, 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.

  • Contributions In Kind

    Contributions In Kind

    In our previous article we dealt with the share capital of SA. We had the opportunity to approach its undeniable importance for the existence, survival and development of the AU. We dealt, among other things, with its potential composition. We referred, regarding the latter, to the type of contributions (monetary and in kind) that may constitute the share capital. The latter (:contributions in kind), due to their importance and particularities, will be the focus of he present article.

     

    Concept And Content

    The concept of contributions in kind arises from the law itself (: article 17 of law 4548/2018). In fact, they are defined negatively (§1): These are those contributions “…that are not in money”. Furthermore, in fact, it is specified (§2) that “contributions in kind consist only of assets, which can be subject to a monetary valuation”. However, this position raises questions. And this is because all assets, without exception, can have a cash value (more precisely: they can be “measured” according to the Greek Accounting Standards – chapter 5, law 4308/2014).

    The context of the valuation is sometimes clearer and specific and other times more blurred and debatable. Ambiguities and significant discrepancies are what the legislator wanted to limit. They therefore explicitly excluded from the contributions in kind those claims that are uncertain as to their fulfillment: claims which may be overestimated arbitrarily.

    The following can also not constitute contributions in kind (§2), “…claims arising from the undertaking of an obligation to perform work or provide services”. This provision differs from those applicable in PCC. In the specific type of company, the contribution of work or services is permissible as a non-capital contribution (: article 78 of Law 4072/2012). The SA, on the other hand can, in a corresponding case, grant those who provide work or services (not shares but) founding securities. They become, in this way, creditors of the SA.

    Examples of contributions in kind include, among others, the transfer of ownership or the concession of use of movable or immovable property, the transfer of rights, e.g. industrial property (: trademark, patent), of a business or a sector, receivables and securities.

     

    The Determinants of Contributions in Kind

    Any contribution in kind to the share capital of the SA presupposes (Article 17 §1) the reporting of specific information; specifically: (a) the type of contribution, (b) the person who undertakes the obligation to pay it and (c) the amount of the capital to which the specific contribution corresponds. The specific references take place in the articles of association (:if it is a payment of the initial capital of the SA) or, as the case may be, in the decision of the competent corporate body, General Assembly or Board of Directors, (:if it is a share capital increase):

    At the establishment of the SA: The method of payment of the capital is included among the elements that constitute the minimum mandatory content of the articles of association (Article 5 §1, paragraph d’). Therefore, the mention of the specific information is mandatory. Failure to do so may, in fact, lead to judicial annulment of the company (article 11 par. 1, par. a’).

    During the increase of its share capital: Negative legal consequences can also occur in the event that the decision of the body that decides on the increase of the share capital (Board of Directors or General Assembly) omits to mention the aforementioned information. These decisions are subject to nullity (articles 138 on the General Assembly and 95 on the Board of Directors).

    It should be noted, however, that in the event that the articles of association or the decision to increase the share capital “…does not define the category of contributions (that is, whether they will be in money or in kind), then it is considered that all contributions are in money” (ind.: 2331/2006 Court of Appeal of Thessaloniki).

     

    The Obligation for Valuation

    A condition for the valid payment of contributions in kind is their valuation, the “official”, i.e., verification of their value. The specific verification takes place when the contribution is made (during the formation of the SA or, as the case may be, the increase of its capital).

    The estimation of contributions in kind aims to avoid the risk of overestimating these contributions and creating, in excess, a fictitious share capital.

    Competent Persons

    The legislator particularly aims at the reliability of the persons who will carry out the valuation of contributions in kind. Therefore, they provide that the valuation report is drawn up “…by two chartered accountants or an auditing firm or, as the case may be, by two independent certified valuers” (Article 17 §3).

    Through the assignment of the valuation to the specific persons, Law 4548/2018 aims, and rightly so, to reduce the state supervision of the SA. In order to achieve this goal, after all, they proceeded to the necessary abolition of the (known, of dubious reliability and, in any case, obsolete) Committee of article 9 of Law 2190/1920 (ie: the three-member assessment committee, which was most commonly composed of civil servants). The latter was tasked, however not exclusively – under the previous regime, with carrying out the valuation.

    Furthermore, it becomes permissible for chartered accountants or certified valuers to hire special valuers, domestic or foreign, for the valuation of assets that require specialized knowledge or international experience.

    Avoiding Conflicts of Interest & Ensuring Independence

    The legislator wanted, reasonably so, to ensure the reliability of the assessment of contributions in kind. They sought to avoid a conflict of interests of the persons carrying out the assessment. Also, to safeguard their independence and impartiality.

    For this purpose, they provided for a series of requirements, which cannot be bypassed by the aforementioned competent persons. Specifically, these persons cannot: (a) be the ones making the contribution in kind, (b) be members of the board of directors of the SA, (c) maintain a business or have other professional relationship with the company or the contributor or (d) be related to the specified persons up to the second degree or being their spouses.

    Furthermore, the law provides that: (e) “…for the chartered accountants and for the auditing companies, of which they are members, there must not be any obstacles or incompatibilities that would preclude the carrying out of a regular audit by these persons, nor can they have carried out the regular audit of the company or of a company connected to it…within the last three years.” (article 17 §4).

    Content of Valuation Report

    The Valuation Report should, by law (Article 17 §5) contain: (a) the description of each contribution in kind, (b) reference to the valuation methods applied – the choice of which is left to the appraiser and (c) the opinion for the value of each contribution. In fact, in the event that the valuation results in a price range, the report must indicate a final price.

    Furthermore, the law specifies the factors to be taken into account in the report for the valuation of fixed assets (Article 17 §6). The characterization of an element depends on its continuous use by the company (which must exceed a one-year period-law 4308/2014, Annex A΄). The price at which the valuation report ends is the highest possible price, with which the contribution in kind may be equal to (Article 17 §7).

    Duration of Utilization of the Valuation Report

    The payment of contributions in kind, based on the valuation report, may not take place after six months from the time of its drawing up. If the six-month period expires, a new valuation should take place so that the payment of contributions in kind is not affected (Article 17 §9).

    Publicity of the Valuation Report

    Valuation reports of contributions in kind must be published in the Business Registry. The ones concerned are responsible for the publication. It is noted, however, that each valuation report is sent directly to the Business Registry, without being subject to any approval or acceptance by the Administrative Authority (: Recitals of n. 4548/2018 on article 17). It is also underlined that, for new companies, the publicity takes place simultaneously with the registration of the company in the Business Registry (article 17 §8, section b).

     

    Exemptions from the Obligation for a Valuation Report

    Valuation of contributions in kind is not mandatory in every case. The provisions of article 18 of Law 4548/2018 provide the SA with the possibility to avoid, if it so wishes, the valuation of specific assets that are being contributed (see immediately below). This possibility is provided both during the establishment of the SA and in any increase of its capital. It is decided, respectively, either by the founders in the SA statute or by the body that decides on the increase.

    This specific (facilitating) possibility is provided in three cases, only and if the special conditions provided for by law are met. In particular, no valuation is required when the subject of the contribution in kind:

    (a) They are money market instruments or transferable securities.

    (b) Are assets, other than transferable securities or money market instruments, which have already been the subject of a valuation for their fair value by a recognized independent expert.

    (c) They are assets, other than securities or money market instruments, the fair value of which is determined, for each of them, from the Balance Sheet of the previous financial year.

    A common feature of the above exceptions is the fact that the value of the contributed assets has already been determined by reliable sources. A new valuation is required, however, in the event that since the time of calculating the value of the assets contributed, an event affecting their value has occured.

    As long as contributions are made in kind without valuation, the Board of Directors is obliged to make a declaration, which contains clarifying data (Article 18). This statement aims to inform any interested parties and must be made within one month of making the above contributions. In case of omission, responsibility of the members of the Board of Directors arises.

     

    The Risks For SA, Shareholders & Creditors

    Through the strict regulations, as analyzed above, the legislator sought to minimize the risks deriving from contributions in kind. Some of them:

    (a) Risk of overvaluation of the contributions in kind and the (total) share capital: Any overvaluation would result in the (true) value of the contributions falling short of the apparent value, which would affect the (final) value of the share capital. This possibility carries risks, especially for the creditors of the SA.

    (b) Risk for minority shareholders: Majority shareholders may resort to contributions in kind, with the aim of reducing (or eliminating) the presence, initially, and then expelling the minority. However, such a decision could, under certain conditions, be evaluated as abusive (and, therefore) voidable, in the event that it proved not to serve the corporate interest.

    (c) Risk for the interests of third parties and in particular, lenders of the SA: through the so-called hidden contributions (: during the establishment or increase, a contribution in money is first paid, which is, however, returned to the contributor through the conclusion of a transfer contract to the SA of a specific asset in order to avoid valuation). In order to reduce this risk, specific restrictions and prohibitions are set by law.

    Indeed, in order to avoid this specific risk, it is prohibited, in principle, for the SA to acquire, within the first two years of its establishment, its own assets (Article 19), when the sellers are: the founders, shareholders representing a percentage more than 1/20 of the paid-up capital or members of the Board of Directors, persons related to them or persons controlled by them. Also when the seller acquired from these persons during the last 12 months before the transfer. It should, however, be noted that the limited scope of the above prohibition does not adequately cover the risk in question.

     

    There can be no doubt that the adequacy (even better: the excess) of the share capital in the SA is a factor showing the health of the company: It facilitates the achievement of its statutory purposes and also its development. It increases its creditworthiness and makes it more attractive to potential investors. It always facilitates the administration in its work and, on multiple levels, promotes the interests of its shareholders.

    Things are simple, if not self-evident, when the contributions that make up the share capital are monetary; they are complicated when they are in kind. Especially with regard to the last case (:contributions in kind) for the protection of the company, the shareholders (minority as a rule) but also the third-party lenders, a series of conditions are set, by law – and rightly so, in order for them to be incorporated into the share capital. The question is, always, the health of the business. It is therefore desirable not only to support its capital, but also to faithfully (substantially – and not only “superficially”) apply the rules governing the integration of contributions in kind. The benefit will be, in this case, multi-layered. Besides, contrary practices or lack of compliance not only harm the business (among others), but can also be successfully tackled by the law.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 13th, 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 criminal liabilities in the Société Anonyme

    The criminal liabilities in the Société Anonyme

    Articles 176-181 of Law 4548/2018 standardize the conditions under which criminal liabilities are established against those who operate within an SA.

    Although this is a particularly widespread corporate type, which would justify similar rates of publication of articles and jurisprudence of criminal interest, the rates are nevertheless remarkably low.

     

    Within Law’s 4548/2018 criminal provisions: first approach

    The limited practical application of the provisions in question does not mean that the resulting criminal responsibilities are of minor importance.

    The misdemeanors provided for in articles 176 and 177 of Law 4548/2018, for example, threaten a prison sentence that reaches the upper limit of five years, while the suspension of the execution of a sentence of more than three years constitutes a more complex judicial judgment.

    Moreover, the stigma that inherently accompanies any sentence should not be overlooked: in the light of professional reputation, a potential criminal conviction “undermines” the development or even the survival of the legal person, even if it is imposed on a natural person.

     

    Criminal provisions outside of Law 4548/2018: indicative enumeration

    Criminal responsibilities also arise outside of Law 4548/2018. The source of such provisions is, primarily, the Criminal Code. These are acts of grave disrespect against legal goods, especially ownership, property, privacy, and memoranda.

    At the same time, the issue of criminal liability arises in cases of tax and insurance debts of an SA.

    Finally, it is possible to encounter a case of application of provisions which prohibit the laundering of proceeds from criminal activities and come with heavy sanctions.

     

    The ideological starting point of the author of Law 4548/2018

    The author of Law 4548/2018 is concerned that there is no reason to “create special criminal treatment for SAs”. The fact, therefore, that the criminal provisions of Law 4548/2018 are not justified on the merits should not surprise us, however it does displease us.

    Also, while the legislator declares as their purpose the “reformation of the law of the SA with new legislation”, as far as criminal responsibilities are concerned, they limited themselves to a “slight reformation”, as they claim, of the previous framework.

    It is therefore an open question whether with their choices respond to modern needs, for example, to completely transparent corporate operation and circulation of capital flows.

    In this light, given that the interest goes beyond narrow intra-corporate equity interests, one could evaluate the scope of articles 176-181 of Law 4548/2018, the number of threatened penalties and their place in a wider regulatory framework of a socially just business.

     

    Is a “plethora” of penal regulations a solution?

    Our position certainly does not advocate a “plethora” of provisions of a penal nature. The democratic criminal legislator knows the legitimate limits of the criminalization of acts, which must constitute the last means of achieving an end. The limits of the present article do not allow us to discuss other means.

    The step towards a Société anonyme involves significant non-financial risks. Those interested must be fully informed: “anonyme” (for the company) does not mean “painless” (for the natural person).

    George Karanikolas
    Senior Associate

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 6th, 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 Remuneration Report of the members of the Board of Directors of SAs

    The Remuneration Report of the members of the Board of Directors of SAs

    The issue of remuneration of Board members has been repeatedly addressed in the context of our articles. And so has the conflict of interests of the latter with the SA for this reason; the related risks for the SA; the relevant interest of the company, the shareholders and, of course, the beneficiaries- and clearly the third parties: investors and banks. We have already noted that transparency issues and the need for shareholders to participate in the approval of remuneration are pursued through the “say on pay” principle (including: Articles 9a and 9b of Directive 2007/36 / EC, as amended by Directive 2017/828 / EU). Based on this principle, the remuneration of the members of the Board of Directors should be defined in such a way that the shareholders are able to express an opinion. Given the above, our national legislator re-approached the specific issue with the law on SAs (: Law 4548/2018). It brought, on the one hand, some changes in the procedure and the conditions for granting remuneration to the members of the Board of Directors on the basis of their organic relationship (: Societe Anonyme: Remuneration of the Members of the BoD). It incorporated, on the other hand, two important tools for the transformation of the above principle into national law: (a) the Remuneration Policy and (b) the Remuneration Report. We will then deal with the latter.

     

    Legislative Framework – The distinction of Remuneration Policy from the Remuneration Report

    The issues related to the Remuneration Policy and the Remuneration Report are regulated in the provisions of articles 110-112 of Law 4548/2018. In this way, the provisions of Articles 9a and 9b of the aforementioned Directive 2007/36 / EC-as in force are incorporated into Greek law.

    The two, in particular, tools aim at the transparency and the participation of the shareholders in the issue of the formation of the remuneration of the members of the Board of Directors. Mandatory for listed SAs. Optional for the others. The Remuneration Report retains its independence from the Remuneration Policy, however, it is inextricably linked to the latter. In any case, these are distinct texts, which present two main differences:

    (a) The Remuneration Policy is the means of structuring the strategy of the SA regarding the granting of remuneration to the members of the Board of Directors. It promotes, in this context, its sustainability and long-term interests. In this way, it addresses the future. On the other hand, the Remuneration Report is a comprehensive overview of the total remuneration granted per board member for the previous financial year. It concerns, that is, the previous year and is of  an accounting character.

    (b) Regarding the Remuneration Policy, the shareholders’ vote is binding. On the other hand, their vote on the Remuneration Report has an advisory character.

     

    Subjective and objective scope

    The Remuneration Report is drafted collectively by the Board of Directors of the SA (: article 96 §2 law 4548/2018). The responsibility they bear in case of any violation of the provisions regarding the Remuneration Report is also collective (: article 112 §6 b). Therefore, the members of the Board are responsible in cases of violation based on the provision of article 102 of law 4548/2018. They also bear criminal responsibility, based on the provision of article 179 §3 law 4548/2018.

    The Remuneration Report must include the complete overview of the remuneration of the members of the Board of Directors, which were foreseen to be paid by the Remuneration Policy of the previous financial year (: article 112 §1 law 4548/2018). This is a fact, regardless of whether the latter (: members of the Board of Directors) are newer, older, executive, non-executive or independent. The recording must be made, in each case, in a clear and comprehensible manner. However, its subjective field may occupy other persons as well. When, for example, by statutory regulation, the application of the provisions for the Remuneration Policy and Report is extended to the executives, as they are regulated by the International Accounting Standards (article 24 §9). The latter, in this case, will refer to the payments of the specific persons as well.

    The concept of remuneration, in the context of the Remuneration Report, is conceptually identical to that of the Remuneration Policy. In other words: the Remuneration Report includes the total remuneration granted (or still owed) to the members of the Board of Directors in their organic capacity and position. The Remuneration Report is not interested in other fees. Such as, for example, those that are due, in a special relationship deriving from an employment, mandate, independent services or works contract [int .: Societe Anonyme: Contracts with Members of the BoD for the Provision of (Additional) Services].

     

    Content

    The minimum content of the Remuneration Report is provided in the provision of article 112 §2, law 4548/2018. At the same time, the European Commission has adopted a targeted consultation with guidelines for the standard presentation of the information contained in the earnings report. The final guidelines are still pending.

    The content of the Remuneration Report concerns the remuneration of each member of the Board separately. It basically includes: (a) the total remuneration paid as well as the way the manner it was paid was in accordance with the approved Remuneration Policy; (b) the annual change in remuneration, the performance of the company and the average remuneration of employees, excluding executives, during the last five years. The Remuneration Report also mentions: (c) any remuneration of any kind coming from any company belonging to the same group; (d) participation in equity schemes; (e) the options exercised; (f) information on the possibility of reclaiming remuneration; (g) the circumstances under which derogations from the remuneration report may have taken place, in accordance with the provisions of Article 110 §6 (inadvertently in Article 112 §2 f.g. reference is made to the repealed §7).

     

    The advisory vote of the shareholders

    The shareholders vote (in the context of the ordinary General Assembly with the relevant item on the agenda) on the remuneration report of the last financial year. Their vote, however, is advisory. This means that the shareholders’ decision does not bind the SA, although the voting is mandatory. The Board, however, has an additional obligation regarding the outcome of this vote. Specifically, it “… must explain in the next Remuneration Report the way in which the above result of the vote was taken into account…” (art. 112 §3 Law 4548/2018). It is concluded, therefore, that the SA may not take into account the above result at all, as long as it explains the way it worked in the next Remuneration Report that it will submit to the General Assembly.

     

    Publicity Formalities and Personal Data

    The Remuneration Report is subject to specific publicity formalities. The SA, however, must also post the Remuneration Report on its website, immediately after the relevant vote of the General Assembly. This posting must be for a period of ten years (article 112 §4 of Law 4548/2018). The period of posting can exceed the ten years, in case it no longer includes personal data of the members of the Board.

    We therefore confirm that the provisions of Law 4548/2018 are intertwined (and) in this case, with the requirements of Regulation 679/2016 / EC for the Protection of Personal Data. As already mentioned, the Remuneration Report refers individually to each member of the Board. This means that their personal data are being processed. The legal basis of this processing is the provision of article 112 §5 of law 4548/2018. The purpose of the processing in this provision is defined as the increase of transparency “… regarding the remuneration of the members of the Board of Directors, with the aim of strengthening the accountability of the members and the supervision of the shareholders on these remunerations”. However, the special categories of personal data according to article 9 §1 of the Regulation are explicitly excluded from the above processing and the Remuneration Report. These are the personal data that reveal “… racial or ethnic origin, political views, religious or philosophical beliefs or participation in a trade union, as well as the processing of genetic data, biometric data for the purpose of unambiguous identification of health or data relating to the sexual life of a natural person or sexual orientation “. In case, for example, that the granting of an allowance depends on any illness of the member of the Board of Directors, the Remuneration Report should include only the amount of this allowance. The cause must not be mentioned.

     

    Judicial review and the possibility of reducing salaries

    In the case of the Remuneration Report, the provision of article 109 §7 of Law 4548/2018 applies to the possibility of reducing remuneration after the issuance of a court decision. Such a reduction may take place in cases where there was a substantial change in the conditions under which the Remuneration Policy was approved and it was not revised (article 110 §2 law 4548/2018). This is, essentially, a judicial review of the Remuneration Policy. The application to the competent court, in this case, is exercised within an exclusive period of two (2) months from the voting on the Remuneration Report.

    The compliance review with the approved Remuneration Policy of the SA is carried out by the Remuneration Report. It would not be possible, after all, to approve remuneration for the members of the Board of Directors (and / or specific executives) without providing a compliance review.

     

    The obligation to prepare a Remuneration Report (for the review of the approved Remuneration Policy) is borne, as we mentioned in the introduction, by companies with shares listed on a regulated market. They both contribute to increasing corporate transparency and strengthening the (necessary) corporate governance. The accountability of the members of the Board of Directors and the supervision of the shareholders on their salaries is strengthened. They therefore promote the interests of the company and its shareholders. They make the companies that adopt them more transparent (and, therefore, attractive for investors).

    Therefore, their adoption by all companies is desirable.

    Even by the non-listed ones.-

     

     

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (April 11, 2021).

     

    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 Remuneration Policy of the members of the Board of Directors of the SA

    The Remuneration Policy of the members of the Board of Directors of the SA

    The remuneration of the members of the Board of Directors of an SA is a “hot” issue for everyone interested: the company, the shareholders and, of course, the beneficiary. But it also interests third parties: investors and banks. Our national legislator re-approached this issue with the law on SAs (Law 4548/2018). The procedure and conditions for granting remuneration to the members of the Board of Directors on the basis of their organic relationship were covered in our previous article (: Societe Anonyme: Remuneration of the Members of the BoD). At the present article, we will be concerned with the Remuneration Policy. A Mandatory Policy for companies with shares listed on regulated markets (Article 110 §1). A policy welcome, without a doubt, by the rest.

    Remuneration of board members and conflict of interest ˙ the (global) debate

    The remuneration received by the members of the Board of Directors may, under certain conditions, be detrimental to the SA. This is, moreover, a typical case of conflict of interests. It can be proven harmful when, for example, in some cases they are associated with the achievement of high goals (indicatively: the company’s turnover). It is then possible for the members of the Board of Directors to sacrifice the management of the SA by excessive risk-taking, on the altar of achievement of their, short-term, own benefit.

    The recent long-term financial crisis “brought” to our country the global debate over the exorbitant fees of the members of the Board. The basis of the relevant concerns is often the lack of sufficient transparency but also the substantial participation of the shareholders in their approval. Their goal is to defend, ultimately, the corporate interest.

    The achievement of this objective is pursued through the “say on pay” principle (inter: Articles 9a and 9b of Directive 2007/36/EC, as amended by Directive 2017/828/EU). Based on this principle, the remuneration of the members of the Board of Directors should be defined in such a way that the shareholders are able to express an opinion. The tool of its implementation is the Remuneration Policy (as is the Remuneration Report) which have already been transposed into national law.

     

    Legislative framework

    The national legislator regulated the matters related to the Remuneration Policy (and the Remuneration Report) in the provisions of articles 110-112 of law 4548/2018. In this way, it incorporated into Greek law the provisions of articles 9a and 9b of the aforementioned Directive-as in force.

    With the Remuneration Policy (article 110 and 111 of law 4548/2018), which will concern us in this article, the strategy of the SA regarding the granting of remuneration to the members of the Board of Directors is structured. The SA’s sustainability and long-term interests are also promoted. The content of the Remuneration Report (article 112 of law 4548/2018) regards the remuneration granted to the members of the Board of Directors (or that are still due) for the previous year. It is not permissible, of course, for the paid salaries to deviate from what the Remuneration Policy stipulates.

     

    Remuneration policy

    The obligation to establish it

    As we “hurried” to note in the introduction, not all SAs are obliged to adopt a Remuneration Policy. This obligation is typically borne only by companies with shares listed on a regulated market. Both for the members of the Board of Directors and for the general manager, if any, and their deputy (article 110 §1). However, with a relevant statutory regulation, it is possible to apply the provisions for the Policy and Remuneration Report in two more cases: (a) to the executives, as they are regulated by the International Accounting Standards (article 24 par. 9) and (b) to unlisted SAs. We aim, in these cases, for greater transparency towards the shareholders. For the benefit, in the end, of SA.

    The obligation to establish a Remuneration Policy covers the remuneration granted to the members of the Board of Directors in their organic capacity and position. It does not cover, in other words, other fees. Such as, for example, those that are due for a special relationship of employment, mandate, independent services or works [int .: Societe Anonyme: Contracts with Members of the BoD for the Provision of (Additional) Services].

     

    The responsibility of the General Assembly

    Competent body for the approval of the Remuneration Policy is defined by law (article 110 §2) to be the General Assembly. This is a transformation of the principle we have already mentioned: “say on pay” [principle, which, however, already existed in the pre-existing national law (art. 24 par. 2 law 2190/1920)]. The shareholders’ vote is binding. In other words: the SA has no right to deviate from the decision of its shareholders.

    A simple quorum and majority is sufficient for the decision of the General Assembly (for the approval, ie, or not of the Remuneration Policy). In the initial wording of Law 4548/2018, it was provided that in the relevant voting the shareholders who happened to be, themselves, members of the Board of Directors did not have the right to vote. This prohibition is no longer in place (: abolished by law 4587/2018).

    In case of approval of the Remuneration Policy by the General Assembly, its duration extends, at a maximum, to four years from the relevant decision. It will, however, require further submission and approval by the General Assembly, when the conditions under which it was approved change substantially (even within four years) (Article 110 §2).

    When the General Assembly is called upon to approve a new Remuneration Policy after the expiration of the previous one, it is, of course, entitled to reject it. In this case the company is bound by the Policy previously approved. The duration of the latter is extended until the next General Assembly, when a new, revised Remuneration Policy is submitted (article 110 §4).

     

    The possibility of deviating from the Remuneration Policy

    The obligation to re-submit for approval the Remuneration Policy should be distinguished from the possibility of derogation from it (Article 110 §6). The specific / provided for derogation is, in exceptional circumstances, permissible. As long as three, basic, conditions are met. Specifically:

    (a) There is a relevant provision in the Remuneration Policy of the procedural conditions for the derogation.

    (b) There is a relevant provision in the Remuneration Policy of the items in respect of which the derogation may occur.

    (c) The need for the derogation serves the long-term interests of the company as a whole or ensures its viability.

     

    The body responsible for submission of the Policy to the General Assembly

    The Board of Directors is the competent body of the company for the submission of the Remuneration Policy to the General Assembly for approval. It is true that the specific competence of the Board of Directors does not explicitly arise from the wording of the law. On the contrary, it is derived, as a collective duty of the members of the Board of Directors, to ensure the preparation and publication, inter alia, of the Remuneration Report (article 96 §2 of law 4548/2018). However, we do not find a corresponding provision for the Remuneration Policy. This, however, does not mean that the members of the Board do not have the obligation to draft the Remuneration Policy and submit it to the General Assembly.

    An different interpretation would not be compatible with the recent law on corporate governance (Law 4706/2020). As we mentioned in a previous article [The (new) law on Corporate Governance (and a comparative overview with the preexisting one)], the relevant law introduces, in addition to the Audit Committee, two additional committees of the Board (Article 10): The Nominations Committee and the Remuneration Committee. The latter is responsible for: “formulating proposals to the Board of Directors regarding the remuneration policy submitted for approval to the General Assembly, in accordance with paragraph 2 of article 110 of law 4548/2018” (: article 11 a’). In addition, it examines the information included in the Remuneration Report, providing an opinion to the Board of Directors (art. 11 par. C).

     

    The content of the Remuneration Policy

    The provisions of the Remuneration Policy must be recorded in a clear and comprehensible manner. Its (minimum) content is determined, in sufficient detail, in the provision of article 111 §1 law 4548/2018 (which constitutes an exact transposition of the relevant provisions of article 9a of Directive 2007/36/EC).

    The minimum content, for example, should be the way in which this Remuneration Policy contributes to the business strategy, the long-term interests and the viability of the company. In addition, the different components for the granting of fixed and variable remuneration of all kinds as well as the criteria for their granting. The methods used to assess the degree of fulfillment of the specific criteria. The conditions for the postponement of the payment of the variable remuneration and its duration. The duration and content of the employment contracts of the members of the company’s Board of Directors – any existing retirement plans. Any share disposal rights and options. The decision-making process for the approval and determination of the content of the remuneration policy and so on.

     

    The disclosure formalities

    The central goal of the Remuneration Policy of the members of the Board of Directors is to enhance transparency. The justification is the possibility of constant information of all interested persons (especially shareholders and investors). It is therefore not paradoxical that the Remuneration Policy is made public (articles 110 §5 as well as 12 & 13). At the same time, however, it must remain available on the company’s website for as long as it is valid (art. 110 par. 5).

     

    The existence and, in particular, the proper implementation of the Remuneration Policy of the members of the Board of Directors, constitutes an important obligation of the companies that have shares listed on a regulated market. This obligation arises from the (recent) law on Société’ Anonymes. However, it also has strong foundations in the (absolutely recent) law on corporate governance.

    The value of the Remuneration Policy lies in the strengthening of corporate governance. And where the latter is strengthened, the companies that invest in it end up benefiting. After all, what investor will not see positively a company that has invested in corporate governance? Which bank will not, at least, increase the creditworthiness of a company with a strong relevant performance? Any relative costs for adopting a Remuneration Policy and complying with its content seem small compared to the reasonably expected benefits.

    Obviously for unlisted companies as well.

    Especially, perhaps, for them.-

     

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (April 4, 2021).

     

    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.

  • Societe Anonyme: Remuneration of the Members of the BoD

    Societe Anonyme: Remuneration of the Members of the BoD

    The Board of Directors of the Société Anonyme acts, in principle, collectively. However, it is possible (: a rule without exceptions) to delegate the powers to bind and represent to a specific member. It is also common for board members to associate with the SA through special relationships. Indicatively, with contracts of employment, works, independent services or mandate. These contracts (also) provide for the fees that the SA (must) pay them for their specific, additional, services. These issues have already occupied us in our previous article [: Contracts of Board Members for the Provision of (Additional) Services]. In this article we will deal with the issues of remuneration of the members of the Board of Directors that the SA (sometimes) pays them in the context of their internal relationship. In the latter case, the legal basis for the payment of remuneration must be sought in the articles of association, in a decision of the General Assembly or in the remuneration policy that may be adopted by the SA (: obligatory if it is listed).

     

    Establishment of a control mechanism in the remuneration of the members of the Board of Directors

    As already announced by the explanatory memorandum of law 4548/2018, the remuneration regime of the members of the Board of Directors is reformed (with articles 109 et seq.). A specific framework is chosen for the protection of the SA and the minority shareholders. The justifying reason? The risk of impairment of the corporate assets of the SA due to exorbitant fees and other, disproportionate benefits.

    It is noteworthy, however, that the specific provisions (Articles 109 et seq.) “… do not apply in the case of compensations and expenses paid under an approved by law, where required, legal relationship (eg expenses in the context of work or mandate) and / or provided by law (eg CC 723), as after all, it is still valid today, in accordance with the position of the case law”. In other words, what is regulated in independent contracts between the Company and the members of its Board of Directors: (a) is valid independently (we also addressed the specific issues in our aforementioned article) and (b) is not occupied by the regulatory scope of the provisions that we attempt to approach here.

    Therefore, based on the type of remuneration that the members of the Board of Directors may receive in the context of their organic relationship, the terms, the procedure of their granting (but also the relevant restrictions in place) are analyzed as follows:

    Fees and benefits that do not consist of participation in the profits of the year

    Types of fees and other benefits

    The remuneration of salaried consultants consists of a fixed, as a rule, “remuneration”. This, however, is not a rule without exception. The type of pay varies depending on the case. It may take, as an indication, the form of compensation per session or the award of a bonus. Other benefits may include housing, security and / or a car.

    The determination of fees in the articles of association or in the remuneration policy of the company

    Remuneration or other benefits are legally paid to the members of the Board of Directors – provided that there is a relevant provision in the articles of association or in the remuneration policy of the company (article 109 §1 law 4548/18). In more detail:

    (a) Regarding the (possible) provision in the articles of association

    The articles of association may provide for the granting of remuneration to specific (or all) members of the Board. This possibility seems more theoretical as we will rarely and in very special cases encounter it. These are fees, the granting of which concerns (obviously) the future. Retrospective forecasting is excluded. In addition: a mere reference to the articles of association regarding the right to receive remuneration is not enough. The fee must be specified (in the amount and the conditions of its payment) in the articles of association.

    In case it is required to mediate a decision of the General Assembly for its determination, it is considered (and it is) a fee which is granted after the approval of the General Assembly (see below) and not on the basis of the statutory provision.

    We should consider that the regulation of the remuneration determined by the statute also includes the provision for the maximum, the final amount of which is determined by a decision of the General Assembly. However, the same does not apply in those cases where the statute stipulates its minimum amount and it is left to the General Assembly to determine the amount to be finally paid. We must consider, in the latter case, that this is a fee determined by the General Assembly.

    The statutory provision for the payment of remuneration to the members of the Board of Directors may exist in the initial statute of the SA- the one drafted for its establishment. It is, however, possible that the relevant provision will be introduced later – after an amendment, ie, of the statute by a decision of the General Assembly. Unless otherwise provided by the Articles of Association, the relevant decision shall be taken by the usual quorum and majority.

    (b) Remuneration policy

    The determination of fees in the company policy is regulated, specifically, by articles 110-111 of law 4548 / 2018. Remuneration policy arrangements are mandatory for companies with shares listed on a regulated market. Of course, this does not rule out the possibility that other companies will adopt a similar remuneration policy. For these latter companies, the relevant statutory provision is necessary in any case. The further analysis, however, of the remuneration policy will be the subject of a different article of ours.

     

    The granting of fees after a special decision of the General Assembly

    In the event that there is no provision in the law or the articles of association of the SA (and without prejudice to the provisions of the remuneration policy): “… remuneration or benefit granted to a member of the board of directors… shall be borne by the company only if approved by a special decision of the General Assembly…” (article 109 §1 law 4548/18).

    In contrast to the pre-existing law (article 24 §2 b’ of law 2190/1920), article 109 refers to a decision of the General Assembly and not of an ordinary General Assembly. This does not mean, however, that the relevant responsibility is now assigned to the extraordinary General Assembly. The argument in favor of the exclusive competence of the ordinary General Assembly is not without value.

    The above, approving, decision of the General Assembly should be specific. Therefore, the approval of remuneration or other benefits to the members of the Board of Directors should be an independent item on its agenda. The decision for the approval is taken with the usual quorum and majority. However, it is possible for the articles of association to introduce increased, respectively, percentages. It follows from the wording of the provision that the approval of the General Assembly for the granting of remuneration or other benefits can only concern the previous corporate year. A corresponding approval for future payments cannot take place – but it is possible to pay sums in advance for future fees (as we will see later on).

     

    Fees from the participation in the profits of the year

    For the granting of remuneration consisting of corporate profits, a prerequisite is the relevant provision in the articles of association of the SA. However, the general, relevant, provision is sufficient. The determination of the amount of these fees may take place following a decision of the General Assembly. The decision shall be taken, as defined in paragraph 2 of Article 109, by a simple quorum. A GA, in this case, is considered the ordinary one.

    The fees in this case are taken from the balance of net profits that may remain after deducting the amounts corresponding to the formation of the regular reserve and the distribution of the minimum dividend (: articles 160 §2 and 161 Law 4548/2018). It is possible, however, in any case, for the articles os association to impose further restrictions.

    The specific fees, therefore, are directly dependent on the existence of profits: It is not possible to approve (and, much more, pay) such fees when there are no profits. This works in favor of the company in two ways: (a) It is not possible for the company to be burdened when it has no profits and (b) It provides (indirect) incentive to the members of the Board of Directors to maximize the profitability of the SA.

     

    The advance payment of fees

    As already mentioned above, it is possible to pay an advance to members of the Board of Directors: “The General Assembly may allow an advance payment for the period up to the next ordinary General Assembly. The advance payment of the fee is subject to its approval by the next regular General Assembly” (article 109 §4 law 4548/18). The law does not specify the fees that may be paid in advance. However, it is not considered possible to pay a fee in the case of:

    (a) Profit sharing

    It is not considered possible to deposit fees that will eventually consist of a participation in the company’s profits. This is because, at the time of the down payment, it is not possible to make a secure prediction of the existence of net profits; much less to determine the net profits available to board members for remuneration.

    (b) Fees provided by the articles of association

    Advance payment of fees, the granting of which is provided for in the articles of association of the SA, is also not considered possible. The reason is that these fees are paid under the terms, conditions, time and procedure provided therein.

     

    Judicial review of the amount of fees

    The grid of regulations set by article 109 of law 4548/2018 does not let the decisions concerning the payment of remuneration to the members of the BoD go virtually unchecked even when the set conditions are met. In fact, the relevant choice of the legislator seems reasonable as it is not uncommon for the majority of the shareholders to decide to grant unjustifiably high salaries to members of the Board. Such decisions are usually taken in those cases where the majority of the shareholders (or persons related to them) happen to be members of the Board, without the latter really being entitled to the fees decided to be paid to them.

    In these cases, the right of minority shareholders to oppose to the decision for the payment of remuneration or benefit, of any kind, to a specific member of the Board is recognized. A necessary (formal) condition is that the minority shareholders represent 1/10 of the paid up (according to the most correct point of view) capital of the SA. If the specific formal condition is met, the court may (at the request of shareholders, by those who objected, representing 1/20 of the paid up capital -article 109 §5 law 4548/2018) evaluate, based on the data which will be taken into account, that the remuneration decided to be paid to a member of the Board is excessive and should be reduced.

    The application to the court must be submitted within an exclusive period of two months from the relevant approval of the General Assembly. It is noted, however, that the fees paid to the members of the Board on the basis of a special relationship / contract are outside the framework of this judicial review.

     

    We should consider it reasonable and, at the same time, imperative to have a clear separation (first of all in our minds) of the qualities of the shareholder, the member of the Board of Directors but also of the employee / provider of services to the SA. In this context, we must accept that the specific persons (must) have a different benefit from their participation in the SA. The shareholder from the dividends due to them; the employee / service provider from the fees provided by the relevant contracts; the member of the Board of Directors from the fees provided (or not) by the statutory regulations and possible decisions of the General Assembly.

    It is true that (especially) in the context of family SAs the aforementioned qualities are “blurred”. It is in these cases that, above all, there should be a separation of the company’s finances from the pocket of the entrepreneur, the establishment of (not mandatory but necessary-essentially) rules of corporate governance.

    In fact, this is not only for the benefit of minority shareholders. It is mainly for the benefit of the company but also of its development.

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 21, 2021).

     

    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.

  • Equal Shareholders in an SA. A blessing or a curse?

    Equal Shareholders in an SA. A blessing or a curse?

    Exactly one hundred years ago, the Greek legislator dealt with the SAfor the first time. They had in mind a legal entity where the shareholders would be, in principle, different from those who would run it. The shareholders would exercise their rights through the General Assembly. The members of the Board of Directors and the management of the company would be discrete roles. We find, over time, that the property right over the company (: shareholders) is “confused” or identified with the company’s management. Often the participation in the company’s share capital, for reasons of (projected) equality, (but mainly due to both sides’ insecurity) is set at 50% -50% for the two, unique, shareholders / groups of shareholders. Some would characterize these percentages as a blessing. Some as a curse. For those who know: Two equal / only shareholders prove to be problematic for any legal entity. And maybe it is a bit worse in an SA. But again, maybe not…

     

    Images drawn from life (and not from movie scripts)…

    Every new business starts, as a rule, with the best intentions. When the founder is just one person, things are more simple.

    When they are two, it is less…

    At the beginning of a business cooperation, the two, only, founders & equal partners, usually walk harmoniously. But then, sometimes, things change. One of the two (and / or both) sometimes chooses to exercise power over the other. Others times, possibly, their problematic personal relationships are mirrored in the management of the company. And, of course, in the legal entity itself and its business activity. That is when we have a problem. Sometimes, a very serious one.

    It is possible to reach the same problem when the founders-brothers (or very close friends) and 50% shareholders are replaced, over time, by their successors. Successors (or heirs) who will seek to get the “upper hand” in the, among them, informal bras de fer.

    The same problem may arise when the only founder and shareholder of the SA dies and leaves (by will or without one) as equal heirs and successors their two children. Children who, when it comes to claiming power, may prove to not love each other enough. Let’s also not forget that their spouses’ meddling (often, as we see) gives them a nudge to that direction as well.

    We all know such (and many other similar) stories. And continue to see them. All too often. More often in family businesses (do not forget, after all, that in our country they make up 80% of the total number of businesses). However, we will encounter such phenomena in all sub-categories of businesses. Without exception.

    So what happens next?

    We are all too familiar!

    At the most part, it is not pleasant…

     

    The «50/50» SA

    In other words:

    The main problem, on a practical level, arises when we are faced with only two, equal, voting rights.

    We usually attribute this phenomenon with the term “SA: 50/50”.

    The point when it is created varies. It can be created at the point of the establishment of the company (: when it is founded by two, equal, shareholders). It can also be created during the company’s operation (: subsequent configuration of two, equal, shareholdings).

    “Equal participation” may also be the result of the existence (or creation) of groups of shareholders (whether or not bound by extra-corporate agreements). Each of these groups holds 50% of a company’s voting rights. Shareholders (or groups of shareholders) may, at times, not be just two. Such a case would be encountered, for example, when two shareholders (or groups of shareholders) hold 1/3 of the shares and voting rights each, while the shareholders representing the last 1/3 abstain from making decisions.

    The two, equal, shareholdings are problematic when the holders of the 50% voting rights of the company do not agree in making critical corporate decisions and / or in the election of the Board of Directors.

    As the case law accepts, “in these cases, the lack of communication between the shareholders, leads to the immobilization of the company and its operation is lead to a deadlock, as it is impossible to reach a simple majority in the General Assembly to make decisions, with the main problem being the General Assembly not being able to elect a Board of Directors.” (18191/2014 Multimember Court of First Instance of Thessaloniki).

     

    The provisions of the legislator

    The legislator could not ignore those specific, problematic cases. Those cases where the SA cannot operate. Or worse, those cases where the company reaches a deadlock due to the inability of the General Assembly (and/or of the Board of Directors) to make decisions.

    The dissolution of the company by a court

    The law generally provides the possibility of dissolving the company, “if there is an important reason for this, which, in an obvious and permanent way, makes the continuation of the company impossible” (article 166 §1 law 4548/2018).

    Moreover: “An important reason according to paragraph 1 exists, in particular, if, due to equal participation of shareholders in the company, the election of the board of directors is impossible or the company cannot operate”. (article 166 par. 2).

    The SA is dissolved by virtue of a court decision. Procedural prerequisite: the submission of a relevant application before the Single Member Court of First Instance of the place of the company’s registered office. An application notified to the latter and adjudicated by the non-contentious procedure (article 166 §3).

     

    The acquisition of the shares of the SA

    The company’s dissolution must, reasonably, be the last resort to address the impasses created in a company with equal shareholders. This is because a direct consequence of such is the loss of the shareholder status of all the shareholders, the termination of the company as a legal entity and the ultimate disappearance of the latter from the legal and business world.

    In an effort to avoid the last resort of the dissolution of the SA, the legislator provides for/prefers an alternative. A solution that promotes the continuation of the company. This is the option (and possibility) of acquiring the shares of the company. Specifically:

    …by decision of the Court

    The Court, which will handdle the request for the dissolution of the SA, “… before issuing its decision, provides the company and the shareholders with a reasonable period of time to remove the grounds for dissolution, in particular through redemption of shares between the shareholders, unless it reasonably considers that this measure is pointless. This deadline can be two (2) to four (4) months. If the above deadline is provided, the court may order measures for the temporary settlement of corporate cases.” (article 166 par. 4). Such a deadline (: for the removal of the grounds for termination) cannot be extended (as provided by the previous legislation).

    …or as an initiative of the other shareholders

    However, the shareholders themselves, those who do not want the company’s dissolution, are also given the opportunity to claim the redemption of the shares of the one (or of those) who request the company’s judicial dissolution. This is the power of the (non-applicant) shareholders of 1/3 of the share capital (and not of the 1/5, as the pre-existing law required) to excursive a main intervention in the lawsuit opened regarding the dissolution of the company. Specifically:

    “Shareholders representing at least one third (1/3) of the capital, can intervene in the relevant lawsuit and request the redemption of all the shares of the applicant or applicants. In this case, the court orders the redemption and determines the consideration, which must be fair and correspond to the value of these shares, as well as the terms of its payment. In order to determine the value, the court may order an expert examination carried out in accordance with Article 17. The redemption value may not exceed the amount that the plaintiffs are likely to receive in the event of liquidation of the company, which the court may increase up to twenty percent (20%)” (Article 166 §5).

    It should be noted here that this provision absolutely determines the method of valuation of the redeemed shares. It is well known that there are many such methods that enable those who perform them to get a wide range of results. The legislator here explicitly chooses the value “which the plaintiffs are likely to receive in case of liquidation of the company”. This value can be increased by the court “up to twenty percent (20%)”.

    In the event of a redemption of shares, in accordance with the manner immediately mentioned above, “any provisions of the articles of association for the freezing of such shares … shall not be taken into account, unless the articles of association provide otherwise. “ (article 166 par. 6).

     

    The exception of listed companies

    The SAs whose shares are listed on a regulated market (and consequently the equal shareholding rights in it) are explicitly excluded from the possibility of a judicial dissolution for a “great” reason (article 166 par. 9 law 4548 / 2018).

    We find a corresponding provision in the pre-existing law (article 48a par. 9 of law 2190/1920). A justification for this legislative choice is (also) foundin the explanatory memorandum of Law 3604/2007, which amended the aforementioned provision of article 48a. Specifically, as it is explicitly noted in it, the provisions of article 48a “… apply only to non-listed companies, because in listed companies the shareholder can in principle leave the company by selling their shares.”.

     

    Conditions for exercising the right to a judicial dissolution due to “equal participation in the company”

    The provision of article 166 of law 4548/2018 is mandatory. This means that any statutory arrangements that are contrary (or divergent) in content to this provision are void. The conditions for exercising this right can be summarized as follows:

    The standing to bring an action

    The right to request a judicial dissolution of the company is exercised only by a shareholder. Therefore, members of the Board of Directors, creditors of the company and auditors do not have this right. Even if they justify, in some way, a relevant legal interest.

    The condition of the applicant being a shareholder is supplemented by the requirement of the holding of a specific, minimum, percentage of the share capital. Applicant shareholders (one or more) must raise at least 1/3 of the paid-up share capital. According to the wording of the relevant provision, a simple holding of shares is not sufficient. Their value must also have been paid for in full. However, the type of shares that make up the necessary 1/3 is irrelevant.

     

    The existence of a “great” reason

    The right to request the dissolution of the SA has, as already mentioned, a central goal. To solve impasses that the SA and its shareholders have reached.

    Therefore, “a great reason is required, which, in an obvious and permanent way, makes the continuation of the company impossible” (art. 166 §1).

    Such an important (according to article 166 §2) reason “exists, especially if, due to equal shareholders in the company, the election of the board of directors is impossible or the company cannot function”.

    Therefore: the existence of equal shareholders is not enough to request the dissolution of an SA. A great reason is required, like the one required by law. The inability, e.g., to elect the Board of Directors and of the operation of the company due to the existence of two equal (with equal voting rights) shareholders (or groups of shareholders) who are unable, systematically, to agree on the decisions necessary for the operation of the company.

    In fact, the situation mentioned above must lead to the impossibility of electing a Board of Directors or must obstruct the operation of the company in general. In particular:

    Regarding the impossibility of electing a Board of Directors:

    The impossibility, in this case, concerns the General Assembly. Specifically, the case in which the General Assembly is unable to make a decision regarding the election of the Board of Directors. A prerequisite, in fact, is the “… situation that shows elements of permanence.” (3494/2010 Multimember Court of First Instance of Athens). The alleged inability to make a decision, for example, in a single (extraordinary) general assembly “… primarily lacks the element of permanence required to be present, in order to substantiate the great reason for the decision of the court to dissolve … the SA.” While, at the same time, general statements of the applicant that “… they intend to vote against in any future proposal or issue raised in the General Assembly… and will concern issues of major importance for the operation of the SA, such as the approval of balance sheets, and that this event will make it obviously and permanently impossible to continue the operation of the company, it is not enough to make their claim legally stand …, since no preventive judicial protection is provided… ”(18191/2014 Multimember Court of First Instance of Thessaloniki).

     

    Regarding the inability of the company to operate:

    The inability, in this case, concerns the Board of Directors. This is the case in which a fictitious lack of administration is identified. In other words: there is a Board of Directors, but it is unable to make decisions. This fact obstructs the operation of the societe anonyme. In fact, in a complete and permanent way.

    However, it is completely different when the operation of the SA is not obstructed in a complete and permanent way. In the case that “… the inability to make decisions is at the level of the Board, or because there has been a real lack of administration due to e.g. death or resignation of some or all members of the Board, or because there has been a fictitious lack of management due to e.g. stubbornness or assertiveness of its members…, implicit resignation-abstention from decision-making…, disagreements of members resulting in inability to exercise management…, the problem can be solved even with the removal of the members of the Board and the appointment of new members by the General Assembly, after the appointment of an interim administration that will convene the General Assembly“. (18191/2014 Multimember Court of First Instance of Thessaloniki).

    Therefore, the inability of the Board of Directors to form decisions, which can be addressed by:

    (a) Removal of its members and election of new members by the General Assembly and / or

    (b) appointment of an interim administration under Article 69 of the Civil Code;

    cannot constitute an important reason for a judicial dissolution of the SA. Provided, of course, that the internal involvement is not permanent and, at the same time, it is not found within the General Assembly. It is clear that an SA cannot operate indefinitely with judicially appointed administrations.

    The above disagreements of the shareholders or of the members of the Board of Directors should be demonstrated through the minutes of the meetings of the General Meeting or of the Board of Directors. At the same time, the correlations of forces may be proved by other means, such as, for example, from the extra-corporate agreements of the shareholders (18191/2014 Multimember Court of First Instance of Thessaloniki, 3494/2010 Multimember Court of First Instance of Athens).

     

    Equal participation in an SA (especially in the case of 50/50 SAs) creates, quite frequently, insurmountable problems.

    Unanimity is required in the General Assembly that is called, for example, to elect a Board of Directors. If unanimity is not reached, in a continuous and permanent manner, the SA is left without administration. However, the company is also left without administration in case there is a Board of Directors, but one that is unable to make decisions.

    In both cases, the company cannot operate.

    To address the extremely serious problem, the law provides specific, quite effective, tools. The dissolution (or threat of dissolution) of the company is one. One that is so strong that it, in fact, sometimes, shocks. Justifiably. Because sometimes such (shocking and extreme) solutions are required, in order to ensure the survival of the company at the last moment.

    It is obvious that the solutions provided by law should be adopted as a last resort.

    Before these extreme solutions there are, without a doubt, other, milder ones.

    Extra-corporate shareholder agreements, statutory arrangements and provisions, the management of minority rights are some of them.

    And first of all:

    The avoidance, for as long as possible, of the establishment and operation of as SA with its shares and voting rights divided in two.

    The responsibility of the founders, the transferring shareholders and of those who plan their succession proves to be extremely serious. It is, however, perfectly manageable.

    As long as timely management of the whole issue takes place. Before, of course, the cration of the problem.

    Ex-post solutions, although painful, still exist.

    In any case: there are no “canned” solutions.

    Only tailor made.

    Always.-

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 18, 2020).

     

    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.

  • Shareholder Agreements: safeguarding minority shareholders

    Shareholder Agreements: safeguarding minority shareholders

    The articles of association of a company are the “law” that governs (in addition to the current institutional framework) its operation. The articles of association, however, are not always sufficient to regulate all related relations. Especially those that develop among the shareholders. The need for additional agreements then arises. Agreements that either move on the edge of the law or that would preferably not have the publicity that the law reserves for the statute and its regulations. We are talking, in this case, about extra-corporate agreements. But what is their value? How does law and case law treat such agreements?

    This topic seems (and is) huge. Let us try, however, a brief and substantive approach. In the light, in particular, of the SA.

     

    The capital and union nature of SA. Their manipulation.

    The societe anonyme belongs to the category of capital companies. As such, the success of its corporate purpose presupposes only the property contribution of the shareholders. Their personal contribution is not legally necessary. It is not even tolerable, unless it is allowed by the articles of association. Let us also take into account the “union-like organization” of the societe anonyme. In the context of this (the union-like organization), the operation of the SA does not depend on the will of each of the shareholders.

    The acquisition of the status of shareholder in a SA creates relations between them and it (: shareholder-SA). Not, basically, and among the shareholders.

    The shareholders of SA clearly aim at the characteristics and advantages of its capital nature. Possibly in of its “union-like” organization as well.

    However, there are many cases where shareholders (may also) have other aspirations. The manipulation, for example, of the purely capital and union nature of the SA. The introduction to the operation and organization of characteristics a partnership would have. The specific aspirations / needs are covered, in particular, through statutory clauses. Sometimes, when this is not possible (or when we do not want it to become, more broadly, known) such aspirations are satisfied through extra-corporate agreements.

    We most commonly find these agreements in family SAs. But it is not unheard of to also find such agreements in other types (as well as in multi-shareholder) SAs. for the service (permanent or temporary) of common, among the shareholders, aspirations.

     

    The concept of extra-corporate agreements

    Extra-corporate agreements, according to jurisprudence, are “independent, written or oral commitments of an obligatory nature, which oblige the contracted parties (and only them) to a certain behavior beyond the behavior towards the company required by the statutory provisions and the law”. (int .: 25/2012 Multimember Court of First Instance of Samos).

    The most common examples of such agreements are those that direct the shareholder’s rights to vote in the General Assembly and the Board of Directors. Under the pre-existing law we encountered, as a matter of fact, contractual restrictions on the transfer of shares. However, sufficient relevant powers are recognized in the context of the statutory regulations under the current law.

     

    The targets. The interests served

    Extra-corporate agreements are not entered into to promote the interests of the company. Their main goal is to serve the interests of the contracting shareholders. Mainly of the minority shareholders.

    The minority shareholders are therefore the ones who, as a rule, will require the conclusion of such agreements. As a prerequisite for their entry into the company and securing their investment. As a guarantee of the company’s operation based on specific, pre-agreed upon, rules. As a means of engaging the majority in a particular direction. As a tool for creating strong minorities – with rights extended to those recognized by law and the statute to minority shareholders. As a “statute charter” of the partners in order to create strong minorities or majorities and enjoy the related rights.

     

    The legal status of extra-corporate agreements

    Extra-corporate agreements are not covered by special legislation.

    They are not provided for and are not guaranteed by a special provision of law.

    However, the conclusion and regulation of such agreements is, in principle, permissible. It is left to the freedom of contracts (361 Civil Code). So, basically, their content can be formulated freely. The individual regulations that impose sanctions in case of their violation are also freely chosen.

     

    Individual distinctions and characteristics of extra-corporate agreements

    The content and individual characteristics of the shareholder agreements are determined by the will and the needs of the respective shareholders.

    Individual characteristics that give a different content to these agreements each time may be:

    (a) The time of their conclusion: The extra-corporate agreements can be concluded during the establishment of the company. Possibly, however, also at a later time – during the company’s operation.

    (b) Duration: shareholder agreements can be concluded for a definite or indefinite period.

    (c) Their incorporation (or not) in the articles of association: Such an agreement may be incorporated in the articles of association of the company. Then, of course, it loses the nature of the extra-corporate agreement. We are talking, in this case, about a statutory agreement. Such an (internal) agreement may specify a provision of the law governing SAs (Law 4548/2018).

    However, the content of the shareholder agreement may not be tolerated either by law or by statute. In this case, (by conversion-182 Civil Code) its validity as a binding agreement of the parties is possible.

    (d) Regarding the creation of obligations for only one or all of the contracted parties: The extra-corporate shareholder agreements are divided into unilateral and multilateral.

    Unilateral agreements are those that give rise to obligations to the detriment of one or more parties. In the case, for example, of an agreement for the exercise of voting rights in a specific direction. Unilateral extra-corporate agreements can take on different legal characterizations. Especially that of the order (713 Civil Code).

    Multilateral agreements are those, through which all parties undertake obligations to each other. Their usual legal form is that of a civil company (741 Civil Code).

    (e) In terms of their content: Extra-corporate agreements, depending on their content, are divided into contracts that generate rights and obligations for the parties and guarantee contracts. In the latter, their content is the guarantee of the demonstration of certain behavior.

    Ensuring compliance with the extra-corporate agreements

    Violation of an extra-corporate agreement creates a claim for damages against the offender.

    It is not uncommon to conclude, in addition – in order to ensure its application-, a penalty clause, which activates in case a party violates its obligations. The court, however, is ultimately the one that will decide whether or not such a clause is activated. Also, its possible reduction to the “appropriate measure” (article 409 of the Civil Code).

    Compliance with an extra-corporate agreement can be sought through other, additional, measures. By delivery to a third party, for example, of the shares whose voting rights are blocked or, through their contribution to another company.

    The validity and binding nature of extra-corporate agreements

    Extra-corporate agreements are obligatory in nature. They are therefore governed by civil law.

    Regarding the relationship between them and the statutory provisions, two distinct views have been expressed in theory.

    The theory of separation

    The prevailing theory is the separation between the articles of association and the respective extra-corporate agreement. According to this theory, extra-corporate agreements, due to their different legal nature, go hand in hand with the statutory regulations.

    The statutory regulations, according to the same theory, are those that prevail over the extra-corporate agreements. The former are governed solely by corporate law, the latter by civil law.

    The theory of unity

    However, the theory of unity of the articles of association and the extra-corporate agreement entered by all shareholders, has also been supported.

    It is argued, on this basis, that the extra-corporate agreement takes on an interpretative role of the provisions of the articles of association – in terms of the organization, operation and management of the company. Therefore, its validity extends, in addition to the contracted parties, to the legal entity of the company. Extra-corporate agreements, in this case, take on the nature of a statutory contract.

     

    The consequences (& claims) of the breach of an extra-corporate agreement

    The obligatory nature of the non-corporate agreements, as mentioned above, is important. The respective extra-corporate agreement of the shareholders, “… is valid between the parties to the contract, has no consequences of company law nature and is not binding…” for those who have not entered into it (Supreme Court 1121/2006).

    The claims, therefore, raised in cases of their violation concern the payment of compensation. Such compensation covers the positive loss and, in addition, any lost profits. And the forfeiture, of course, of a penalty clause – if such has been agreed. Which, not infrequently, is chosen as a solution, as it is always extremely difficult to determine the due and payable compensation.

    In cases where the protection of the rights of the minority is sought through the extra-corporate agreements, the minority shareholder does not have the right, in case of violation, to seek their execution. This is because: “… there is no possibility for the minority shareholder to claim from their counterparty in an extra-company agreement a majority shareholder the fulfillment by the latter of what was agreed between them and in particular to claim their conviction in a declaration of will in accordance with the content of the agreement “(569/2007 Multimember Court of First Instance of Athens). This is exactly where the risk of a bona fide party to a non-corporate agreement runs. That is, the risk of the agreement to be deliberately violated in bad faith, without it being possible to enforce it through a court decision.

    However, it is accepted that, despite the prevalence of the theory of separation, a decision of the GA of shareholders taken in violation of an extra-corporate agreement may be found invalid. Specifically, the invalidity of a decision of the General Assembly due to (an abusive) breach of an extra-corporate agreement (Supreme Court 1121/2006) has been ruled by jurisprudence.

     

    The validity (and invalidity) of extra-corporate agreements

    Extra-corporate agreements, as mentioned above, are (in principle) permissible. They are legally based on the freedom of contracts (361 of the Civil Code). Their content is left to the will of the parties.

    Of course, extra-corporate agreements are checked for their validity, just like any contract. In other words, the grounds for cancellation due to fraud, error and threat also apply. Of course, so do the common reasons for invalidity. It does not acceptable, for example, for them to oppose accepted principles of morality.

    At the same time, however, the extra-corporate agreements are valid, as long as they do not violate provisions of the articles of association, company law or other public policy.

    It has been ruled by case law, for example, that “… the replacement of the board of directors by an extra-corporate agreement is not legal” (1631/2006 Supreme Court).

     

    Especially: the issue of unanimity

    One of the issues that, not infrequently, concerns minority shareholders is the (possibility or not) to claim unanimity. It has been ruled that “… the obligation arising from the above agreement unanimously in making decisions on issues of competence and operation of both the General Assembly as well as the Board, contradicts with the concept of the accepted principles of morality as formulated in articles 178 and 179 of the Civil Code, for the reason that an obligation to take all decisions unanimously by the shareholders, even included in a long-term contract, the validity of which extends to perpetual, covering the life of the company, without the possibility of termination and under the threat of an extremely high penalty clause in case of its violation, excessively restricts the free exercise of corporate rights by the shareholders ”. (25/2012 Multimember Court of First Instance of Samos).

     

    The law and the statute of an SA are not always possible to cover the complex relationships that develop between its shareholders. To ensure the always desired balances between them. To successfully manage problems that may arise in the future. To ease (present or future) concerns.

    Extra-corporate agreements are those that seek to provide solutions. But their bindingness seems (and is) legally limited. The effort to strengthen them may, in the end, be to the detriment of the one whose rights it seeks to secure.

    Their provisions are always proving to be crucial.

    Their wording as well.

    stavros-koumentakis

    Stavros Koumentakis
    Managing Partner

     

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 23, 2020).

     

    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.

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