Tag: κτήση warrants

In our previous article we dealt with the issuance of warrants and their acquisition by the SA that issued them (or by its subsidiary). However, how is the option to acquire the shares resulting from the warrants exercised? Let’s see.

 

The Exercise of the Right to Acquire Shares

As we have already established, the one who is entitled to exercise (or not) the right to acquire shares, a right incorporated in the warrants, is their beneficiary. The relevant issues are regulated in the law on SAs (art. 58, law 4548/18).

The exercise of the specific (formative) right is what initiates the increase of the SA’s share capital.

It should, of course, be clarified here that the specific right concerns the third-party holders of the warrants: It is not possible for the issuer SA to exercise it, insofar as it concerns the same share acquisition warrants or shares acquisition warrants of its parent company, which it may own (No. 58 §1 in fine).

 

Legal Exercise – Conditions

Manner And Type

The exercise of the option of the warrant is similar to the exercise of the convertible bond conversion right (see also Explanatory Memorandum of Law 4548/2018- art. 58). It is carried out with an explicit (unilateral and addressable) declaration of the beneficiary of the warrants to the SA (art. 58 §1 paragraph a’). Specific formalities are not required by law, however, in transactional practice, the document is chosen. In the case of listed warrants, the procedure specifically provided for should be followed.

At the same time, however, with this particular declaration, the payment of the consideration already agreed, at the time of issuance, by the beneficiary is also required. The SA does not need to take any other action in order to increase the share capital by issuing new shares. The relevant decisions have already been taken by the time the warrants are made available. The SA, for its part, has already committed itself. It is now up to the relevant decision of the beneficiary to exercise their related rights.

Terms and Conditions

The exercise of the right by the beneficiary of the warrants is not, however, completely free of terms and conditions. It is reasonable for the warrants to provide for various, relevant, commitments and procedures (referring, for example, to the procedure for submitting the relevant declaration, the deadline and the price for acquiring the shares attributable). It is also possible to provide for special rights of the issuing company, which will potentially limit, in time or quantity, the corresponding ones of the beneficiary of the warrants (the time-limited, e.g., right of the SA to suspend or block the exercise of the option right).

The Payment of Consideration

The acquisition of the shares by the beneficiary of the warrants does not automatically occur with their relevant declaration. A prerequisite is, of course, the full payment of the (pre-agreed and predetermined) price of the shares to be issued (art. 58 § 1 sub. a’). Partial payment is not an option.

If the beneficiary of the warrants fails to pay the agreed price in full, they will not acquire the shares corresponding to their option (in contrast to what applies in the case of a share subscription agreement). Unless the contrary has been expressly agreed during the issuance of the warrants.

The Irrevocable of the Declaration

The declaration of the beneficiary of the warrants for the acquisition of the shares corresponding to them is, first of all, irrevocable. This is consistent with the character of the option as formative. However, it is possible for the parties involved to agree on a right of withdrawal on the part of the beneficiary (under specific conditions and within strict time limits). In this way, risks and doubts regarding the timing of changes in the capital of the SA will be mitigated. The non-payment, however, of the price by the beneficiary of the warrants – when this is mandatory – can only be deduced (at a practical level, in fact) the revocation of the declaration for the exercise of the right to acquire the shares.

The Delivery Of The Title

As long as the warrants are incorporated into a paper security, their beneficiary is obliged to deliver it to its issuer.

 

Consequences of the Declaration of Exercise of the Option

The declaration of exercise of the option by the beneficiary of the warrants finally removes the uncertainty status of the SA and also of the existing shareholders. The decision for corporate participation is solemnly manifested and, subject to the payment of the (probably) pre-agreed price, the acquisition of shares and shareholder status by them will immediately follow.

 

Consequences of the Exercise of the Option

The Increase Of Share Capital

The exercise of the option, which derives from the warrants (: relevant declaration and payment of the agreed price) results in: (a) the increase of the share capital of the issuing SA (art. 58 § 3), (b) the (primary) acquisition shares by the holder of the title and (c) the cancellation of the title of the latter in terms of the option – to the extent that it has already been exercised.

In this particular increase, the time of coverage and payment of the share capital, as a matter of fact, coincide. The amount of the new shareholder’s contribution will consist, cumulatively, of the price they will have paid and the consideration, if any, for the acquisition of the warrants in the past. The latter, in fact, consideration should have been registered in a special reserve “from the issuance of the warrant certificates”.

The nominal value of the shares issued may not exceed the sum of the two amounts (: price and consideration paid in the past – art. 58 §2). This, moreover, is imposed by the prohibition of issuing shares below par. The latter aims to ensure payment of the entire share capital.

The beneficiary of the warrants becomes, originally, a shareholder of the SA – without, in fact, the latter’s involvement. Consequently, the existing shareholding balances are changed as no right of preference is recognized in favor of the existing shareholders in the specific share capital increase (art. 58 § 4). These, moreover, used up their relevant right (by exercising it or not) during the stage of issuing the warrants.

Obligations of the SA

With the increase of the share capital, the (former owner of the warrants) now shareholder maintains a claim (of a declaratory nature, however) against the company for registration in the shareholders’ book. In addition, however, they have a claim to recieve paper stock certificates – provided, of course, that the SA issues such.

In the event that the holder of the warrants was granted by the issuer SA the right to partially exercise the options, new warrants must be delivered for their remaining rights and the warrants that will be issued – if there are any.

Obligations of the Board of Directors

The time limits for the exercise of the right of the holder of the warrants are what determine the time for the amendment, on behalf of the BoD, of the article of its articles of association regarding the share capital. In any case, the Board of Directors is obliged within two (2) months, from the exercise of said right, to complete its adjustment (art. 58 § 3 ed. b’). It is supported, from a portion of the theory, an obligation of the SA to certify the payment of the relevant increases in the share capital.

 

Consequences of Not Exercising the Right

In the event that the expiry time of the warrants (and therefore the built-in option) elapses, on the one hand, the relevant warrants will be canceled and, at the same time, the increase in the share capital will be cancelled.

The former, now, beneficiary of the warrants will not have a claim for a refund of the price that, possibly, they paid in an earlier time (when they were issued), for their acquisition. This seems reasonable for an additional reason: this amount will have been registered by the SA, in a special reserve that cannot be distributed.

 

As we have already stated on many levels, the warrants are a means of attracting investment funds and investors for the SA – advantageous, i.e. an option for the same. On the other hand, the holder of the warrants is attracted to their acquisition bearing in mind that at some later point in time, if he himself chooses it and it is an advantageous option for him, he will become its shareholder. In order for the warrants to remain attractive, the exercise of the rights of their beneficiary and the acquisition of his share status should be done easily and quickly. Proceedings: The beneficiary of the warrants, if he so chooses, pays the agreed amount and becomes a shareholder of the SA. Just like that. –

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 20th, 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.

Warrants are an excellent tool for attracting investors and capital to an SA. We approached, among other things, in the context of our related article, issues regarding the issuance of the warrants and the relationship between the issuing SA and their third-party holder. In the direction of the further investigation of this specific institution, we will be concerned, here, with an interesting question: Is it allowed for an SA to become the beneficiary of its own or its parent company’s warrants? And, if so, under what conditions?

 

Acquisition of Warrants

The matters related to the original and derivative acquisition of the same warrants are regulated in the law (art. 57 n. 4548/2018) in an application by analogy of the provisions on the, original and derivative, acquisition of own shares by the SA.

For reasons of protection of the shareholders, the SA and the corporate lenders, it is prohibited (art. 57 §1 paragraph a’) to undertake (primary acquisition) of warrants by the same – upon their issuance. In this way, the future increase of the SA’s share capital with its own participation is avoided (after the exercise, that is, of the options included in the warrants). The taking of warrants by a third party (e.g. a member of the Board of Directors or another), who acts in their own name on behalf of the SA, is also, logically, prohibited.

It is also prohibited, according to a logical sequence, the pledging of warrants, to secure claims of the SA that it issued itself (art. 57 §1 paragraph a’).

On the contrary, (art. 57§2) the derivative-secondary acquisition of warrants (e.g. through purchase) by the SA is allowed. The conditions, in this case, are stricter than those concerning the derivative -secondary acquisition of its own shares.

Finally, the SA is allowed to finance third parties to acquire their own warrants (art. 57 §1 sec. b’). After all, the financial support of third parties often serves the purpose of leveraged buy-outs. A necessary condition, however, is compliance with the conditions for the acquisition of own shares by the SA.

 

In particular: Derivative Acquisition of Warrants

Scope, Risks & Purpose

The acquisition of warrants, in a derivative way, refers to acquisitions (through sale, for example – as already mentioned), carried out by the SA. It also refers to acquisitions, by a third party, who operates in their own name on behalf, however, of the SA (:indirect representative).

The acquisition of warrants by the SA involves risks. The payment of consideration by the company violates the principle of protection of the share capital. Its cash reserves are used, in this case, for prohibited, in principle, purposes: for the acquisition, i.e. of an option to acquire its own shares (which, as such, the SA is forbidden to undertake).

At the same time, in this case, the company’s solvency towards its creditors is reduced. And so is its creditworthiness, the value of the investment for the shareholders and the potential interest of prospective investors.

Despite the obvious risks, however, the acquisition of warrants by the SA is likely to serve its reasonable business and investment interests.

This same acquisition by the SA may, first of all, be the way to avoid the exercise of the option by the transferor-beneficiary of the warrants. In this case, the SA will not be obliged to increase the share capital and issue new shares in the future.

However, there is another, also interesting perspective for the SA: the investment perspective. With the same acquisition of the warrants on its part, it is possible to achieve: (a) More effective utilization of the market conditions for the benefit of the latter (:SA) – as it will then be able to redistribute the warrants at a higher price, in new investors. (b) Diversification of the beneficiaries of the warrants – as long as such a choice serves its strategic goals.

Method of Acquisition

The acquisition by an SA of the warrants issued by itself cannot, of course, take place unilaterally; on the contrary, the cooperation of the respective beneficiary-holder is a prerequisite. The most common way is to sell and transfer them from the latter (their beneficiary) to the SA. A redemption (“withdrawal”) clause of the warrant purchase agreements in international trading practice, is not, however, rare. Such a clause is placed in the issue contract of the specific warrants and makes them redeemable by the issuer. In this way, an option is formed (of a speculative-profit nature) in favor of the SA. Its exercise is subject to predetermined conditions regarding, in particular, the time of exercise as well as the price of the acquisition.

 

Derivative Acquisition Conditions

Cases of transactions involving the derivative acquisition of warrants for consideration (e.g. through sale) are permitted, but stricter prerequisites are provided (compared to those for the acquisition of own shares). And this is because, although it is possible for the proprietary warrants to present an investment interest, the exercise by the company of the options embedded in its own or its parent’s warrants is prohibited (art. 58 § 1 section b’).

Competence

The SA’s decision on the acquisition of warrants it issued itself belongs to its Board of Directors – as a collective body. The relevant approval is provided prior to the acquisition and has a specific duration of validity. The authorization of a substitute body is expressly prohibited (art. 57 §2 section a’).

In its relevant decision, the Board of Directors should justify and link the specific acquisition to the service of the corporate interest (art. 57 §2 paragraphs a’ and b’). In the same decision, the minimum and maximum limits of the acquisition value should also be determined, as they result from the mandatory report of a chartered accountant or accounting firm (art. 57 §3 para. a). The onerous acquisition may not result in the reduction of equity to an amount lower than that prescribed by law (art. 57 §3 para. b and 159§1).

In the event that there are exceptional financial reasons, the decision to acquire the same shares should be taken by the ordinary GA of the SA.

The questions regarding the responsibility of the members of the Board of Directors are determined by the rules of diligent management (art. 96 et seq.). Their criminal liability is also not excluded (art. 177 par. 3).

More Special Terms

The issuer’s contract with the holder of the warrants (and/or special legislative regulations) may further limit the acquisition of the same warrants. In any case, however, the SA, both during the process of purchase and redemption-withdrawal of the warrants, must observe the principle of equal treatment of their holders (art. 57 § 2 section a’). If the warrants are traded on a regulated market or MTF, the provisions to avoid market abuse must also be observed.

Universal Transfer of Property Or us a Donation

Contrary to the limitations and conditions mentioned immediately above regarding the acquisition of warrants for a consideration, the acquisition of the same warrants by the SA in the context of a universal transfer of property (e.g. acquisition by absorption) or for a gratuitous reason (e.g. donation) their observance is not required (art. 57§ 2 section c’).

 

Consequences of Ownership-Liabilities of the SA

The same warrants that the SA acquires, even its own, are assets (: securities) of the company. However, the fate of the warrants that the SA will potentially acquire is, as it appears, predetermined (Art. 57 § 4); it must cancel the specific warrants immediately, since with the same acquisition it sought to repay its obligations as an issuer. However, if the SA became the owner of them without payment of consideration, then it has a window of one month to cancel the warrants or reallocate them.

Companies with listed warrants must inform the investing public about any own acquisition.

Acquisition of own warrants in violation of the above creates an obligation to transfer them within one year, otherwise the warrants are canceled (art. 57 §5).

 

We have already established, in the context of our previous article, that the acquisition of warrants is an excellent investment tool. Their utilization, however, requires special attention. Their acquisition, e.g., by the SA that issued them is prohibited to take place at the time of their issuance. On the other hand, and under strict conditions, it is possible for the issuing SA to acquire them at a time subsequent to their issue – by purchasing them, e.g., from their owner. The purposes and interests of the SA that can be served in this case are not negligible! In any case: in order to complete our view of the warrants, we should also approach the way of exercising the option embodied in them to increase the SA’s share capital. About this, however, see in our next article. –

Stavros Koumentakis
Managing Partner

 

P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 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.