Tag: διοικητικό συμβούλιο ανωνύμων εταιρειών

In our previous article we dealt with the important role of the Board of Directors. We examined, among other things, his powers and powers; additionally: the scope of his powers. We referred to the principle of the collective action of the Board (art. 77 §2 ed. 2 of law 4548/2018) but also to its deviations; for the possibility, e.g. of delegation of powers of the Board of Directors, to individual members or third parties. In the present article we will examine the specific deviations from the rule.

Appointment of Substitute Bodies

In General

In general, the principle (under domestic law) that the Board of Directors acts collectively applies. This particular principle, however, is not without exception. It is possible, e.g., for the Board of Directors to delegate the powers of management and representation of the SA to one or more persons (natural or legal). Members or not. The specific persons are referred to, collectively, as “substitutes” or “subordinates”.

The delegation of powers of the Board of Directors to substitute bodies constitutes, in practice, the rule under which it operates: the Board of Directors operates through its substitute bodies. This seems reasonable. In this way, the everyday operations of the SA is simplified. The speed of its transactions is ensured. The exercise of the tasks and work of the Board of Directors becomes more efficient. Complex issues are easier to manage.

Conditions

The delegation of (organizational) powers to substitute bodies requires compliance with the publicity formalities provided for (not, however, necessary for its validity). Presupposed, however, are cumulatively: the existence of a special statutory provision (art. 87 §1 ed. a΄-1096/1976 plenary session of the Supreme Court) and a relevant decision of the Board of Directors. In more detail:

(a) Statutory Provision: The requirement for the existence of a special statutory provision as a condition for the delegation of organizational powers to substitute bodies does not derive only from the law on SAs (: art. 87 §1 ed. a’). Corresponding provisions are also found in other laws (: art. 65, 67 and 68 CC-1085/2019 QUALEX Legal Database). The provisions, however, of the law on SAs prevail over those, as they are more specific (1510/2006 Supreme Court, NOMOS Legal Database).

In the absence of a special statutory provision, any delegation of power of representation to a member of the Board of Directors or a third party is equated with the granting of a power of attorney (art. 211 et seq. CC -1252/2016 Supreme Court, NOMOS Legal Database).

The articles of association may define the areas for which the Board of Directors will be entitled to delegate management and representation powers. It is also possible to set additional conditions. To limit, e.g., the pool of possible substitute persons by excluding, for example, third parties. Adherence to such terms will constitute an additional condition for the legality of any assignment. The articles of association can, at the same time, define the way of action of the substitute bodies (e.g. with the cooperation of several persons or for specific transactions only).

It is not excluded that the appointment of substitute bodies by the Board of Directors is defined by the statute as mandatory/obligatory. However, there is a difference of opinion as to the binding nature of such an appointment. According to the jurisprudence (and the correct) opinion, it is accepted that the Board must comply with the statutory “order” (ind. 7119/2004 Court of Appeal of Athens, NOMOS Legal Database). In theory, on the other hand, it seems to hold the position that the Board of Directors retains the discretion to choose whether to make a substitution and, if so, which individual persons to appoint.

However, the condition of the special statutory provision is open to deviations. Among other things: (i) the judicial appointment of a special representative of the company to conduct judicial proceedings to annul a decision of the Board of Directors (art. 137 §3) and (ii) the judicial appointment of a special representative of the company to bring a lawsuit against members of the Board of Directors (art. 105).

(b) Decision of the Board of Directors: As long as the required statutory provision/possibility exists, the relevant decision of the Board of Directors for the transfer of its powers can take place.

It is noted, however, that any delegation by the Board of Directors to another body (e.g. the General Assembly or a third party) of its authority to be substituted (the Board of Directors) in the exercise of its powers is invalid. This prohibition, in fact, seems reasonable as it goes against the principle of its autonomy. Besides, the Board of Directors is the most suitable body, not only to assign and identify its substitute persons, but also to distribute – at its discretion – the responsibilities between them.

Also, for the same reasons, the direct delegation of responsibilities to members of the Board of Directors or third parties is excluded by the statute. And even more so on the basis of an extra-company agreement (68/2014 Supreme Court, NOMOS Legal Database). However, it is permissible, exceptionally, to appoint the first Board of Directors upon the establishment of the SA. Also, the performance of individual offices (incl.: president, vice-president, managing director or authorized advisor). And the same goes for the delegation of responsibilities to its members or third parties. The Board of Directors, of course, can (also in the latter case) proceed, at any time, to redistribute and/or revoke the specific offices and responsibilities (art. 87 §3). Any limitation of its specific right will be null and void.

(c) Publicity: The validity of the appointment of a substitute body does not require the observance of specific formalities. The special provision of the articles of association and the relevant decision of the Board of Directors recorded in the minutes are sufficient. The latter is not required to be formally stated (1085/2019 QUALEX Legal Database). It is sufficient that such a will clearly emerges from the delegation decision (:in this context it is argued, rather extremely, that even the implied delegation of powers is valid).

However, the observance of publicity formalities is deemed necessary for opposing the assignment against bona fide third parties. The relevant publication is for informational purposes only.

Appointment Of Substitute Bodies

The Nature of Powers

The decision of the Board of Directors to appoint substitute bodies entails the assumption by them of individual powers (: organizational) of management and representation of the SA. The specific substitute bodies have authority through the law and the statute and their link with the SA is the same as that of the Board of Directors (1086/2019 Supreme Court, QUALEX Legal Database).

Substitute bodies become, in other words, bodies of the company. Equal, in fact, to each other, as all substitute bodies are assimilated in terms of powers (and therefore responsibility), regardless of their status as members of the Board of Directors or not. An organic relationship is created between them and the SA. Hence the name “substitutes” or otherwise “subordinates”.

In a logical sequence, therefore, the bodies in question do not act as trustees/representatives of the SA; a special power of attorney is not required for the exercise of management acts.

The Responsibilities

The transfer of powers can, in principle, concern all or part of the powers of the Board of Directors. The responsibility of the substitute may include the business of one or more category of acts (conclusion of contracts with customers, banking transactions) or specific, only, acts (e.g. conclusion of a specific, only, contract). In the latter case, however, there is no need to comply with publicity formalities.

Substitution, however, is excluded for those powers of the Board of Directors that are assigned by law and concern, exclusively, its action as a collective body. Indicative: (a) the authority to approve the transfer of restricted shares (art. 43) and (b) the certification of payment of the capital (art. 20).

From the articles of association or, more commonly, from the decision of the Board of Directors, it is expected to become clear whether the substitute bodies will act individually or collectively. Otherwise, the collective representation rule will apply.

The Relationship of Actions of Substitutes & the Board

The substitute bodies have parallel authority with the Board of Directors to exercise the powers assigned to them (330/2006 Supreme Court, NOMOS Legal Database). Hierarchically higher and, at the same time, the main body of management and representation of the SA remains, in any case, the Board of Directors. The substitutes, therefore, act independently, but must not ignore the Board. Thus, the autonomy they have in the context of their organic relationship with the company is limited.

The Board of Directors is entitled and obliged to supervise the substitute bodies. At the same time, it is entitled to be informed about the progress of the corporate affairs it has assigned to them. It is also entitled, of course, to modify (even revoke) their powers.

The Duration of Powers

The term of office of the substitute bodies (it is assumed that) follows the term of the Board by which they were appointed. Therefore, in the prevailing opinion, the power given will be shorter or equal in duration to the term of the said Board. Reasonably so, as the delegation of their responsibilities takes place within the framework of a decision of a specific Board of Directors. The opposite point of view is also supported – not correctly in our opinion: of absolute independence and lack of connection between the bodies in question and the Board of Directors, in terms of the temporal scope of their powers.

Therefore, the termination of the term of the Board of Directors (or any recall of its members) will automatically bring about corresponding consequences for the substitute bodies.

The Board of Directors has, as already mentioned, absolute power to revoke the substitute bodies. If the revoked person is a member of the Board of Directors, the powers assigned to them will cease, but the status of the member will remain.

In principle, the General Assembly does not have the power to revoke the substitute bodies. If the General Assembly revokes, however, members of the Board (as always, only it has the right to act) any parallel status as substitute bodies will be automatically revoked. It is noted, however, that if it is a third (non-member of the Board of Directors) substitute body, appointed with the establishment of the SA (art. 87 §3), the General Assembly has the power to revoke it by simply amending the relevant statutory regulation.

Ability to Further assign powers

The substitute body may further delegate all or part of the responsibilities assigned to it to other members of the Board of Directors or third parties. As long as there is (art. 87 §2): (a) Absence of a relevant statutory prohibition (: negative prerequisite) and (b) Provision in the decision of the Board of the possibility of further assignment (: positive prerequisite).

The further assignment takes place under the same conditions as those required for the assignment. At the same time, the further delegation of powers from substitute bodies to other “sub-substitutes” implies, for them, the acquisition of organizational powers of the company. They clearly exercise their powers alongside the substitute bodies and are subject to the supervision of the latter.

The operation of the SA would prove, practically, unfeasible in the event that collective, exclusive action of the members of the Board of Directors would be required to take any decision related to its daily operations. Therefore, the assignment of responsibilities (by the Board of Directors) to substitute bodies is absolutely necessary. Correspondingly, however, of significant importance is the design of the company’s engagement and representation system. Not (only) for the alignment with corporate governance rules (and the always valuable ESG criteria) but also, in particular, for the safety of the company and those involved. In the context, however, of this and also of the possibility of establishing an Internal Audit and an Executive Committee, about which, however, see our next article.-

Stavros Koumentakis
Managing Partner

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

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

The important role of the Board of Directors has already concerned us in our previous article. We referred there, among other things, to the management duty of the Board. Also, to the scope of its powers and responsibilities. We closely approached its responsibilities for management and representation of the SA (: internal relations and relations with third parties – respectively). Here, too, we will be looking into the specific powers in light of the rule of the unlimited and unrestricted power of representation.

The Responsibilities of the Board of Directors

While examining the responsibilities of the Board of Directors, we were already explored the relevant provisions of the law (art. 77 §1 Law 4548/2018). According to them, the SA is managed by the Board of Directors. The content of the administration is the management as well as its judicial and extrajudicial representation. Every management act belongs to the management of the SA. Also: every act of representation constitutes, at the same time, an act of management. Every act of management, however, does not constitute an act of representation.

However, the other provisions of the law also apply. Among them is the one (art. 86§1) which provides that the Board of Directors is competent to decide on every act concerning the management of the company, the management of its property and, in general, the pursuit of its objectives. As far as the fulfillment of the corporate purpose is concerned, the management of the SA is the function that tends, primarily, to its realization – in the narrow sense.

The Corporate Objectives

The term “corporate objective” has two meanings.

In its broadest sense, the corporate objective is what determines the general direction of the SA: it refers to the type of its activity. On the other hand, the exercise of administration and management are carried out with the aim and goal of realizing, as already noted, the corporate objectives – in the narrow sense of the term. The implementation and promotion, i.e., of the object of the corporate activity, as described in the company’s articles of association.

In this specific sense, it is accepted that the corporate objective is not limited only to acts that fall clearly within the exercise of the corporate activity. It includes, on the contrary, an expanded area of actions that serve the long-term goals of the business, based on the perception of transactions. According to the jurisprudence, such actions constitute, indicatively, the acceptance of bills of convenience or the provision of guarantees in favor of a third party (67/2019 Court of Appeal of Dodekanisa, QUALEX Legal Database).

Board Actions unrelated to the Corporate Objectives

The Rule of Unlimited Power of Representation

The rule of the unlimited representation power of the Board of Directors is based on the law (art. 86 §2). It aims, in fact, at the protection of third parties and transactions.

According to the specific regulation, acts of the Board of Directors, even if they do not serve the corporate objectives (either in its broad and/or narrow sense), bind the company vis-à-vis third parties. This rule is not, however, without any exceptions.

The national legislator made use of the exemption provided by the first corporate Directive (2009/101/EC). The Directive in question allows, in particular, an exemption from the commitment of the company from acts outside the corporate purpose in the event that the third parties were, in fact, aware of the relevant violation. And this knowledge can either be proven or indirectly inferred from the fact that the third party could not, given the circumstances, ignore it (see Explanatory Report law 4548/2018 on art. 86).

The national legislator, contrary to the previous law (2190/1920), did not provide for an exception in the case where the third party should have known of the excess exercise of power. That is, they deleted the phrase “or should have known”, which also included third parties who were not aware of the excess of the corporate objective because they did not exercise due diligence. And this is because the specific possibility did not seem to be in line with the aforementioned Directive (see Explanatory Report of law 4548/2018 on art. 86).

The non-commitment of the SA (according to the prevailing opinion in the legal theory), does not occur only in the cases of knowledge by the third party of exceeding the corporate purpose, but also in the cases of their gross negligence.

It is noted, further, that the SA itself bears the burden of proving the incidents that cancel its commitment. The specific, indeed, burden of proof is justified by the purpose of the rule of the unlimited power of representation: the protection, i.e., of third parties and transactions (art. 86 §2. ed. b). However, in cases where there is a clear excess of the corporate purpose, it is accepted that proof of knowledge on the part of the third party is not required. In the case, e.g., of the sale of all the company’s assets (4839/1979 Court of Appeal of Athens, “Epitheorisi Emporikou Dikaiou”, 1980, 249, which concerns the sale of raw materials and equipment of an LLC).

In fact, it is expressly provided that the mere observance of the publicity formalities regarding the company’s statute or its amendments does not constitute proof of the knowledge of the third party (art. 86 §2. ed. c).

It is argued, reasonably, however, that the protection of the third party (even a bona fide one) does not reach, in any case, to the point of binding the SA (also) for actions for which by law the board cannot bind the company. In the case, e.g., when actions are exclusively in the competence of the General Assembly.

Legal Consequences

If the Board of Directors acts in excess of the corporate purpose and the third party-dealer is in bad faith regarding the fact of the excess, concerns arise regarding the legal consequences.

From a point of view, the contract that the Board of Directors enters into with the bad-faith third party is of absolute nullity. The SA is not bound in this case. And in fact, anyone can invoke the invalidity.

From another point of view, the invalidity is relative in favor of the SA: only it is able to project and implement it.

According to a third point of view, however, the provisions of the law (229 et seq. CC) regarding the abuse of power of attorney should be applied, in this case-analogously. According to it, a contract of the Board of Directors, in excess of the corporate purpose with a bad-faith third party, is pending for as long as the Board of Directors does not decide for or against it. Specifically, in the event that the General Assembly, with an increased quorum and majority, approves the above contract, it becomes effective and binds the SA. However, if the SA expressly decides not to approve it, it is not bound.

It should be noted that the SA can take action against the members of the Board of Directors who act in excess of the corporate purpose – as long as the conditions of the law are met (art. 102).

Restrictions From the Articles of Association or the General Assembly

The Rule of Unrestricted Power of Representation

The law, in addition, is what establishes (article 86§3) the rule of non-limitation of the organic power of representation – aiming, likewise, at the protection of third parties and transactions. It provides, in particular, that limitations of the authority of the Board of Directors by the statute or by a decision of the General Assembly are not opposed by third parties. Even if they have been made public.

This provision takes into account the limitation of administrative authority that becomes permissible. In particular, the members of the Board of Directors are obliged to observe the limitations of their authority, whether they are set by the statute or by the General Assembly.

Legal consequences

However, in case of non-observance of these restrictions by members of the Board of Directors, they are not opposed to third parties – even if the latter were aware of them. These restrictions have – as a rule – effect only in the context of internal relations.

The specific regulation (no. 86§3) does not provide for an exception to the non-limitation rule. It is important, however, to note that its absolute and unexceptional wording creates risks for the SA: even in the case of collusion between the Board of Directors and a third party with the aim of not complying with any restrictions, the SA (should be) bound by the carried out transaction with the third party acting in bad faith. Such an approach would, obviously, be dangerous for the SA. The teleological contraction of the provision in question is argued, and rightly so: bad faith third parties should not be protected by the non-limitation of the power of representation.

The protection of those acting in bad faith vis-à-vis the SA should not prevail over the latter. And rightly so. Consequently, acts of the Board, even outside the corporate purpose, bind the company against those who either did not know or were unreasonably unaware of the relevant excess. At the same time, limitations of the power of representation of the Board of Directors set by the statute or the General Assembly will (and must) be opposed against those, only, who operate based on bad faith and with intent to harm the interests of the SA. But often the boundaries between good and bad faith are, unfortunately, indiscernible. Therefore, special attention is required in transactions of particular importance and/or value. The risks, otherwise, will not be negligible for the SA, the (bona fide) third parties and the transactions themselves. –

Stavros Koumentakis
Managing Partner

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

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

In a previous article, we were concerned with the election of the members of the Board of Directors by the General Assembly (: rule). We pointed out, however, that this specific rule is not without exceptions. On those exceptions: the present article.

Appointment of the First Board of Directors in the Initial Articles of Association

An exception to the rule of the election of the Board of Directors by the General Assembly is, first of all, the case of the appointment of the first Board of Directors in the initial statute of the SA (in essence, by the founders of the SA – art. 78 §2, section a’ and §117 2 c. c.). Its term of office will last until the first regular General Assembly, unless otherwise (and specifically) provided for by the statute. The first Board of Directors can also be elected by a universal and without an invitation to the shareholders General Assembly (art. 121 §5, as expressly provided for in art. 78 §2 section b), by signing the minutes of the General Assembly without a meeting (art. 136) or by court decision (art. 69 of the Civil Code, as expressly provided in art. 78 §2 ed. b’).

Direct Appointment of Member(s) by Shareholder

An exception to the rule of election of the Board of Directors by the General Assembly is (also) the personal right to directly appoint a member/members of the Board of Directors. The specific right can be granted to one or more shareholders of the SA (art. 79) – by way of derogation from the principle of equality of shareholders (art. 36 §2). In this case, the representation of the minority in the management of the SA is guaranteed. Also, possibility aids in attracting investors: the participants in the Board of Directors have, moreover, a wider right to information than that of the minority shareholders (see art. 141 §§6 & 7 and art. 142 §4). Said right is non-transferable and non-inheritable-unless otherwise provided by the articles of association; it also is waivable.

Prerequisites

A necessary condition for the granting of the right to directly appoint a member/members of the Board of Directors is (apart from the shareholder status) the relevant statutory provision. It is possible for the articles of association to specify by name the bearer of the relevant right or the qualities or characteristics they must bear (e.g. a minimum percentage of participation in the share capital). It is necessary, in general, to determine the conditions for its exercise; in particular, with regard to the percentage of participation of the shareholder in the capital and the declaration of appointment (art. 79 §1 in fine).

This right can be granted individually to a shareholder(s) or, jointly, to several of them. In the latter case, a joint act of the beneficiaries is required for the appointment of a member/members of the Board of Directors-obviously the same goes for their revocation (art. 79 §5).

The relevant statutory provision may be initial or consequential. In the latter case, an increased quorum and a majority is required at the General Assembly that will decide it (similar to the case of preferred shares – art. 36 §6). According to others, unanimity is required (invoking the proportional application of art. 89, sec. b΄ of the Civil Code)

In any case: this right cannot be revoked without the consent of its beneficiary.

Restrictions

The number of members of the Board of Directors that can be appointed directly, individually or jointly, by a shareholder/shareholders cannot exceed 2/5 of the total number of members of the Board of Directors (art. 79 §1, section a). According to the articles of association, the relevant ratio is maintained even in the event of a change in the number of members of the Board of Directors (art. 79 §4). The other members of the Board of Directors are elected by the General Assembly.

Mode of Exercise

The exercise of said right by the beneficiary-shareholder takes place before the election of the Board of Directors by the General Assembly. The latter, in case of direct appointment, is limited to the election of the remaining members. Shareholder(s) who exercise the right in question shall notify the appointment of the members of the Board of Directors in the company at least three full days before the meeting of the said General Assembly; and, in fact, they do not participate in the election of the rest of the Board of Directors (art. 79 §2). Their shares, respectively, are not counted in the formation of quorum and majority.

There is no legislative provision for the cases of the General Assembly conducted without a formal invitation of the shareholders (art. 121 §5) and the signing of the minutes of the General Assembly (art. 136). However, the non-observance of the above three-day deadline in these cases should be accepted. Also, the simple, relevant, declaration of the beneficiary-shareholder immediately before the election of the Board of Directors.

The shareholder-holder of the right to directly appoint a member of the Board of Directors may not exercise their specific right. In this case they will normally participate in the General Assembly for the election of the Board of Directors.

Revocation

The directly appointed members of the Board of Directors are also freely revoked – at any time – by the holder of the relevant right (art. 79 §3). The latter, in fact, may appoint a new member to replace the revoked one. If they fail or are late to do so, the Board normally operates with its other members – as long as there are not less than three.

If there is a serious reason on the person of the appointed member regarding their incompetence (e.g. non-fulfillment of their duties), shareholders (other than those who appointed them) may legally request their revocation. A necessary prerequisite is that they represent at least 1/10 of the paid-up capital. The relevant judicial process is developed in the framework of the ‘ex parte’ proceedings.

Replacement of (Incomplete) BoD

Another exception to the rule of election of the Board of Directors by the General Assembly is (also) that of the election of a member, by the Board itself, in case of an incomplete (“stump”) Board (art. 82 §1 and 117 §2, para. d)). If there is resignation or death or in any other way loss of the status of a member or of members of the Board, the latter may elect their replacement for the remainder of their term. A relevant statutory provision is not required (see Memorandum to law 4548/2018 on art. 82). Any powers of the replaced are not automatically transferred to their replacement.

Prerequisites

For this election on its part, the following are required (cumulatively): (a) Loss of Member Status, (b) Absence (:non-election) of Substitute Members by the General Assembly (according to article 81) and (c) Legal Composition of the Board (: its remaining members not to be less than three)

Publicity & Notice of Decision

The decision of the election, on the one hand, is submitted to the Business Registry in a declaratory manner (art. 82 §1 in fine) on the other hand, it should be announced at the next General Assembly. The GA can replace the elected member/members, even if there is no relevant item on the agenda (art. 82 §1 in fine).

Incomplete Board Continuation Clause of the Articles of Association

According to the law, a statutory provision for the continuation of the operation of the Board of Directors without replacement of its missing members is permissible (art. 82 §2). As long as the remaining members are more than half of those elected/appointed and not less than three.

Convocation of General Assembly by Incomplete Board of Directors

The members of the incomplete Board of Directors are, however, able to convene a General Assembly with the sole purpose of electing a new Board of Directors – even if they are less than three (art. 82 §3).

Judicial Appointment of the Board of Directors

The last exception to the rule of the election of the Board of Directors by the General Assembly is their appointment by court decision. In addition, the law on SAs refers to the relevant possibility, in case the first board of directors is not defined by the articles of association (art. 78 §2, sec. b΄).

Appointment of temporary administration by virtue of a court decision is imposed (art. 69 CC) as a last resort, in case of “lack of management”; specifically, when: (a) the persons required for the administration of the legal entity are missing or (b) interests conflict between the administration and the counterparts of the legal entity.

Such an appointment can be decided by the court following the application of anyone with a legal interest – during the process of ‘ex parte’ proceedings (art. 786 of the Code of Civil Procedure).

Regarding, in particular, the aforementioned prerequisites:

(a) Case of Absence of Management: It occurs in cases where no members of the Board of Directors are appointed or they have resigned or a member is absent (e.g. due to death or illness). In the cases, also, of the election of the Board of Directors with an invalid decision as well as (in the right opinion) when there is a fictitious lack of management (e.g. refusal to exercise duties by the members).

The appointment of a temporary administration by a court decision is significantly limited, given the provisions of the law on SAs. And this is because, before the legal action, it is possible: to replace the missing members (art. 81) or to elect others from the Board itself (art. 82 §2). Also, the continuation of the operation of the incomplete Board of Directors in the context of the relevant statutory provision (art. 82 §2). It is possible, in any case, to convene a General Assembly by the remaining members of the Board of Directors for the purpose of electing a new Board of Directors (art. 82 §3).

If a request for appointment is made on the basis of one of the above-mentioned cases, the court appoints all the members of the temporary Board of Directors – even if only some of its members have dropped out. Consequently, a mixed temporary Board of Directors, already existing of the judicially appointed members, is not formed. The temporary Board of Directors must proceed, based on what the court decision will determine, to immediately convene a General Assembly for the election of a new Board of Directors.

(b) Case of Conflict of Interests: Occurs in cases where the individual interests of the member of the Board of Directors are contrary to those of the SA. Or takes advantage of business opportunities for their own benefit or the benefit of a third party at the expense of the SA.

In this case, judicial involvement is significantly limited (according to article 69 CC) – given the provisions of the law on SAs: In the context of the duty of loyalty, a member of the board of directors is not entitled to vote on matters in which there is a conflict of interest with their company of the same or related persons (97 §3). It is also possible for the member in question to be replaced (provided this is provided for in the act of election or appointment of the replacement – art. 81 §2).

However, once a relevant application for appointment has taken place, the court appoints (in the most correct opinion) as many members of the Board of Directors as are prevented by the conflict of interest from performing their duties. The temporary administration, in this case, carries out those acts for the performance of which the members being replaced are prevented and/or those, specifically, designated by the court.

The (well-known) rule of electing the Board of Directors by the SA’s General Assembly has particularly interesting exceptions: the appointment of the first Board of Directors (usually by the articles of association), the direct appointment of member(s) by a shareholder or/shareholders, the replacement of absent members by the (“stump”) Board, the appointment of a temporary Board based on a court order. However, the specific exceptions are (in addition to being interesting, also) particularly important – potentially, in fact, problematic: they do not only ensure the smooth operation of the SA, but they also may, under certain conditions, overturn important balances in the management of the company – possibly also the shareholders balances. Therefore, we should all be particularly careful when managing them.

Important issues arise (also) regarding the eligibility and defects in the appointment of the members of the Board of Directors. We will look into them, however, due to their extent and seriousness, in our next article.-

Stavros Koumentakis
Managing Partner

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

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

In our previous article, we looked into the Board of Directors of the SA. Specifically: their operation, authority, members and term of office. However, as its members are not elected only by the General Assembly, interesting issues arise regarding the manner of their election. In the present article we will explore the rule (:election by the General Assembly). In the next article we will explore its exceptions.

The election of the Board of Directors from the G.A.

The rule

As mentioned in the introduction, the members of the Board of Directors are elected (: rule) by the General Assembly – subject to a different regulation in the law, (art. 78 §1, Law 4548/2018 – Memorandum to Law 4548/2018 on Art. 78). We find a similar provision in the provisions concerning the exclusive competence of the General Assembly (art. 117 §1, para. b). The principle of autonomy and self-governance of the SA is served through the election of the BoD by the General Assembly. Its owners (shareholders) have a say and participate in the management of the latter.

The relative competence of the General Assembly cannot be delegated (neither by the General Assembly or the statute) to another body of the SA or a third party. The General Assembly takes the decision to elect the Board of Directors with a simple quorum and majority (art. 130 §1 and 132 §2, respectively). Subject, of course, to the fact that the statute does not require, in this case, greater quorum and majority rates (art. 130 §5 and 132 §3, respectively). It is possible, however, for the statute to require unanimity.

The Exceptions

The rule of electing the board by the General Assembly, however, is not without exceptions. The exceptions established by law (for which see our next article)- are summarized in the following: (a) In the appointment of the first Board of Directors in the initial statute of the SA (art. 78 130 §2). (b) In the direct appointment of a member/members of the Board of Directors by a shareholder (art. 79). (c) In the election of members by the Board of Directors, in case of an incomplete Board of Directors (art. 82 130 §1). (d) In the appointment of a (temporary) Board of Directors pursuant to a court decision (art. 69 of the Civil Code).

Election of the Board of Directors based on lists

In General

The election of the Board of Directors by the General Assembly usually takes place on the basis of the majority system: those who receive the most votes are elected. However, another way of election is also provided for (art. 80 §1): the possibility, specifically, of electing members of the Board of Directors based on lists (: ballots). This is a possibility that was introduced in 2007 (law 3604/2007) in order to remove previous doubts set forth by the legal theory.

In the context of the specific system, it is provided that, subject to a relevant statutory provision, the candidates for election as members of the Board of Directors are proposed to the General Assembly based on lists. The General Assembly elects from among them as members of the Board of Directors according to the proportion of the votes received by each list (art. 80 §1 paragraph a’).

Through this regulation, the proportional election system by the General Assembly is introduced. As a result, there is a more proportional representation of the shareholders in the management of the SA; with a particular interest, of course, for the minorities. Proportional representation in the management of the SA carries, however, risks for the possibility of decision-making by the Board of Directors. Especially for those that (on the basis of a statutory provision or the law) require an increased quorum and majority. The members of the Board of Directors coming from the minority shareholders will be entitled (and it is probable), in this case, that they will vote against.

It is argued (and rightly so) that proportional and majority systems can coexist: a certain number of board members can be elected on the basis of the majority system and the remaining on the basis of lists.

Conditions

(a) Statutory Provision: As we have already mentioned, the election based on lists requires a relevant statutory provision (: positive prerequisite).

The articles of association, however, should specify the procedure to be followed for the election of the members of the Board of Directors based on lists, in order to avoid any disputes. Election methods using list election vary. In fact, it is possible to have only one list. The need for detail concerns (in particular) the way seats are allocated.

Depending on the relevant statutory provisions, from each list are elected: either the persons who received the most votes or those who precede in the order of the list. The rest are considered alternates (art. 80 §1, ed. c and d), who are considered, by law, as substitute members (art. 81 §1, ed. b).

Such a statutory provision may be provided for in the initial statute of the SA. However, it can be introduced and/or abolished by decision of the General Assembly. The relevant decision is taken by a simple quorum and majority, unless the articles of association require higher percentages (art. 80 §1 in fine).

(b) Absence of Statutory Provision for Direct Appointment: In order for the election of Board members to take place on the basis of lists, the absence of a statutory provision for the direct appointment of a Board member/members by a shareholder is assumed (: negative condition) (art. 80 §2). This seems reasonable, as (: Memorandum to law 4548/2018 on art. 80) the two possibilities serve the same purpose: the representation of the minority on the Board.

Alternate Members

Definitive Replacement

In addition to the (in any way elected) members of the Board of Directors, any substitutes may be called upon to play an important role. As such are meant those that are (basically) elected or appointed with the purpose of replacing a member/members in the event of their loss of status.

The possibility of electing or appointing substitute members (art. 81) is intended to deal with the case of a “stump”, as it is called, of the Board. By extension, to prevent legal action for the appointment of a temporary administration (69 CC) , which must be opted for in exceptional cases only. Indeed, given the relevant legislative provision, a corresponding statutory provision is not required (Memorandum to law 4548/2018 on art. 81).

The person who elects or appoints the Board of Directors (or its members) may also elect or appoint substitute members in the event of the resignation or death of the persons elected or appointed by them; also those who, for any other reason, have lost their status of member case of election of members of the Board of Directors based on lists (art. 80), the runners-up are considered as alternate members.

Contrary to the previous regime, the relative possibility of replacement is provided in all cases of election or appointment of the Board of Directors (Memorandum to law 4548/2018 on art. 81). Therefore: not only in case of election by the General Assembly. In turn, the alternate members: (a) will either be elected by the General Assembly and designated in the election decision of the Board of Directors, (b) or will be notified to the SA together with the member appointed, directly, by a shareholder, (c) or the runners-up will be considered as such, in case of election based on lists.

Appointment of substitute members is not, however, possible to take place (as accepted) in the original statute of the SA.

The election or appointment of an alternate member may concern the replacement of a specific member or any of them – depending, of course, on the act of election or appointment of the alternate members. If no relevant reference is made, any replacement may occur for any existing member.

Furthermore, it is required that the appointment of substitute members be published (art. 81 §1 in fine).

Temporary Replacement Due to Conflict of Interests

The replacement of a member of the Board of Directors takes place for the remainder of their term. Any replacement cannot take place due to the temporary unavailability of an existing member.

A deviation from the above, by virtue of a more specific regulation, is introduced in the case of a conflict of interests of a member of the Board of Directors with those of the SA (art. 97 & 81 §2). A necessary condition is that this is provided for in the deed of election or appointment of the substitute member. As expressly stated, in this case the replacement is temporary and concerns the acts for which the conflict exists.

Presence of Substitute Members at Board Meetings

The law provides (art. 81 §3) the possibility of representation of the substitute members at the meetings of the Board of Directors – before they replace a (regular) member. This option is considered necessary, in order for the substitute members to be informed about corporate issues; to be able, consequently, to assume their duties, in case there is a reason for replacement.

In the said meetings, the substitute members do not have the right to vote nor is it necessary for them to be invited to the meetings (Memorandum to law 4548/2018 on art. 81). It is, however, possible for them to take the floor and express their opinion – at the discretion of the president. It is also possible for them to represent another member of the Board of Directors at the meetings (art. 92 §4).

It is common knowledge that (most of the time) the members of the board of an SA are elected by its General Assembly. The latter elects the members of the Board either on the basis of individual nominations or nominations included in lists-ballots. The latter would be a beneficial option for the minority shareholders, but problematic (and therefore is avoided) for the majority. However, the selection of alternate members of the Board of Directors is optimal in order to deal with (potentially) problematic situations (e.g. incomplete composition of the Board of Directors or conflict of interests of its members). Eligible, also, in some cases (and not unusual, and sometimes, in fact, necessary) is the election/appointment of members of the Board of Directors-outside the General Assembly. About them, however, see our next article.-

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (December 11th, 2022).

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

In a previous article we explored the prohibition of the original acquisition of own shares by the SA. In the present article we will look into the permissibility, under conditions, of the derivative acquisition of own shares by the SA and the legal status of the shares that are ultimately acquired by the SA.

Concept & Scope

The possibility of derivative acquisition of own shares by the SA is regulated in the law (art. 49 Law 4548/2018). This is a similar regulation to that of art. 16 of the previous law 2190/1920. However, instead of the administrative penalties, which were foreseen in cases of violation of the relevant conditions and procedures set by the previous law, there is now a criminal provision (see Explanatory Report of law 4548/2018 on art. 49).

The concept in question is broad. It covers, in principle, any acquisition, in a derivative manner, of shares – even if subject to a condition or deadline: with a definitive contract or preliminary agreement, by full or limited right of ownership but also by usufruct. It covers the expropriation as well as the promissory note. Finally, it covers the cases of acquisition, in a derivative way, of own shares through the SA itself through its competent bodies and through a third person, acting in its name and on behalf of the SA (: indirect representative).

Purpose, Risks & Protection

The acquisition, in a derivative manner, of own shares from the SA naturally involves risks. The payment of the relevant consideration by the SA may constitute a return of contributions to the existing shareholders (prohibited in principle). At the same time, in cases where the disputed shares are traded on a regulated market, their acquisition by the SA is likely to constitute an act of manipulation. While, in addition, the possibility of the Board of Directors to acquire these shares for the SA may disturb the equity balances, based on their potentially biased managerial choices.

Despite the above risks, however, the derivative acquisition of own shares by the SA reserves significant advantages for the latter. It is necessary, however, to establish strict conditions and procedures, by law, to minimize the associated risks. All of these are aimed at safeguarding the nature of the share capital vis-à-vis corporate creditors and at protecting the shareholding structure.

The derivative acquisition of own shares provided for by law serves legitimate business and financial interests of SA. It is often included in its investment plans and aims to improve its financial structure.

As a managerial act of the corporate property, it is implemented through the allocation of profits or free reserves of the SA. It does not, therefore, entail the reduction of the SA’s share capital and does not lead to a return of contributions to the shareholders. The SA, on the contrary, increases its flexibility and its adaptability to market developments (1832/2019 Court of Appeal of Thessaloniki sitting with three Judges – Qualex legal database).

Conditions for Acquisition of Own Shares

Adherence to the principle of equal treatment of shareholders

An essential condition for the permissibility of the derivative acquisition of own shares by the SA is the observance of the principle of equal treatment of shareholders of the same category (art. 49 §1, section a), in the sense of ensuring equal opportunities for their participation in the process of acquiring own shares from the SA.

It is argued, from a part of the legal theory, that any own shares acquired by the SA do not change the equity balances within the SA. Therefore, the principal in question does not grant the shareholders the right to dispose of their shares to the SA in accordance with the percentage of their participation in the company’s share capital. However, the opposite opinion is also supported.

Furthermore, reasons of superior corporate interest, as well as the possibility of shareholders waiving the protection of the specific principle, may justify any deviations.

Compliance with market abuse provisions

The next condition for the legality of the acquisition of own shares, in a derivative manner, is the observance of the provisions on the abuse of the market (art. 49 §1, section a’). This condition aims to prevent the risk of market manipulation by listed SAs.

The approval of the General Assembly

For the derivative acquisition of own shares, the law requires the “approval” of the General Assembly. The relevant decision is taken by simple quorum and majority (art. 49 §1, section a) and is publishable (art. 49 §1 section b). Approval is considered to be the prior permission or consent of the General Assembly (1832/2019 Court of Appeal of Thessaloniki sitting with three Judges –Qualex Legal Database) which must be provided, at the latest, until the conclusion of the promissory note. The subsequent consent (according to art. 238 of the Civil Code), is not accepted in this case.

The decision of the General Assembly must include, in particular: (a) the maximum number of shares to be acquired, (b) the duration of the granted approval and (c) the upper and lower limits of the acquisition value, in the case of burdensome acquisitions, with the determination of amounts or percentages.

The mention of the purpose of acquiring own shares remains optional, although crucial.

The maximum time limit for the approval of the General Assembly is set at 24 months. A decision of the General Assembly without specifying the duration of validity of the approval will be defective, and therefore invalid. The same consequence applies to exceeding this maximum time limit. Instead, it is possible to predict minimum time limits.

The date of the reception of the approval decision is considered as the starting date in case of omission of a relevant reference. It is possible, however, to set a later starting date.

If the General Assembly grands more authorizations to the Board, these will apply consecutively. Their renewal, before their expiry, is permissible in all respects.

The competence of the Board of Directors

The derivative acquisition of own shares, as an act of management and representation of the company, falls within the competence of the Board of Directors; it takes place under its responsibility – within the framework of the authorization provided to it.

The acquisition of said shares by existing shareholders, as a result of an individual or public offer (or through the stock market for listed SAs), presupposes (art. 49 § 2):

(a) The nominal value of the shares acquired by the SA to not exceed 1/10 of the paid-up share capital on the date of the decision of the General Assembly. The aforementioned shares include: (i) those previously acquired by the company and retained and (ii) those acquired through any indirect agent.

(b) The acquisition of own shares by the SA may not result in the reduction of equity to an amount lower than that prescribed by law (art. 159 §1). Therefore, the exclusive way of acquiring own shares – due to compelling reasons – is through the utilization of any undistributed profits of past corporate years or relative, for the specific purpose, reserves of the SA.

(c) The transaction may only be in fully paid up shares. This is an application of the principle of formation (payment) of the share capital.

Acquisition For The Benefit Of Employees

Special regulation governs the case of a predetermined, in the decision of the General Assembly, purpose of acquiring own shares in order to distribute them later – free of charge or against consideration (art. 49 §3): (a) to its staff and/or (b) to the employees of an affiliated company (within the meaning of Article 32 of Law 4308/2014). In principle, the aforementioned conditions apply – without, however, the quantitative limitation of 10%.

The contract on the basis of which the employees of the SA provide their services is not of interest -either if it is an employment, independent services, project or mandate contract. It is possible for the recipients to be members of the Board of Directors. In any case, the principle of equal treatment must be observed.

The distribution of shares, usually in exchange for employee performance, is done free of charge or for a price.

The distribution must also take place within twelve months from the date of acquisition of the shares by the SA. With the impracticable passing of the subversive deadline, the acquisition becomes problematic and may arise, under conditions, the obligation of the SA to transfer them within three years. But more on that later.

Variations in Conditions

Exceptions to the rule of strict conditions for the acquisition of own shares are the cases mentioned below (art. 49 §4). Under the condition, however, of not reducing the equity capital of the SA below the minimum levels set for by law (art. 159§1). Their characteristic: The decision of the Board of Directors and the absence of approval by the General Assembly.

The cases in which the acquisition of own shares is permissible, in more detail:

(a) for the purpose of implementing an (actual) capital reduction decision or due to a takeover (pursuant to art. 39),

(b) due to universal transfer of property – in the context of transformation (merger or division by absorption) or succession;

(c) as a donation of fully paid-up shares or from credit institutions and other credit organizations as a commission for a purchase;

(d) due to an obligation arising from the law or a court decision with the aim of protecting the minority shareholders; mainly, in the cases (art. 45) of a merger, change of objective or form of the company, transfer of the headquarters abroad or imposition of restrictions on transfer of the shares as well as the shares acquired for the purpose of satisfying the company’s obligations from a convertible bond loan,

(e) by auction with SA as the bidder and, therefore, confiscation of its own shares.

The maximum time limit for the SA holding the shares in the above, under (b)-(e), cases is three years (art. 49 §5) – on the condition that the nominal value of the total own shares exceeded 1/ 10 of the paid-up capital. The case under (a) is, however, expressly excluded from the relevant transfer obligation within three years.

Upon expiry of the above deadline, the transfer is impossible. The expiry also leads to the cancellation of the own shares with a corresponding reduction of the company’s share capital, following a decision of the General Assembly. The latter is taken by simple quorum and majority (art. 49 §6).

Illegal Acquisition; Liability of Board Members

The acquisition of own shares, in derogation of the provisions of art. 49, entails the obligation to transfer them from the SA (art. 49 §7). The transfer, in particular, must take place within a period of one year from the date of their acquisition. Otherwise, they will be canceled with a corresponding reduction of the SA’s share capital.

The members of the Board of Directors are liable on a civil  (art. 102 § 1) and criminal level (art. 177 §3) against the company for any act or omission during the acquisition of the own shares. Further liability (due to a breach of another protective provision of law, e.g. the principle of equal treatment of shareholders, or the articles of association) is not excluded.

The Legal Status of Own Shares

In any way, direct or indirect, the acquisition of own shares does not provide the SA with the rights of shareholder status, which are suspended (art. 50 § 1). Therefore, the company is not entitled to the right to be represented and vote at the General Assembly. For the sake of preserving the share balances, the shares of the SA are not included in the formation of the quorum.

Furthermore, the dividends of the other shareholders are increased by the corresponding ones of the own shares. This happens to avoid confusion, as the SA cannot be, at the same time, a debtor and creditor of the dividend.

At the same time, in the event of a (non-nominal) increase in the share capital with new contributions, the corresponding right of preference increases, in principle, the right of the other shareholders. Unless the body responsible for the increase decides to transfer the right of preference to a person who does not act on behalf of the SA.

The suspension of the above rights applies until the own shares are transferred to third parties.

In addition, the management report, for the purposes of informing the shareholders, at a minimum includes: (a) the reasons for acquiring own shares, (b) the number, nominal value and the part of the share capital to which they correspond, (c) the value of shares upon acquisition or transfer, and finally (d) the number and nominal value of the total number of shares held by the company and the part of the share capital to which they correspond (art. 50 §2).

The derivative acquisition of own shares provides a series of important advantages for the SA – but also involves not negligible risks. It is therefore (and rightly) governed by a series of strict rules and restrictions, in order not to circumvent protective regulations in favor of the shareholders, the SA and its creditors. It should be further looked into, in the same context, the possibility (or not) of providing credit by the SA for the purchase of its own shares. Regarding this, however, see our article to follow.

Stavros Koumentakis
Managing Partner

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (September 3rd, 2022).

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