Koumentakis

Tag: capital

  • Amortization of capital

    Amortization of capital

    The first reference to the issue of the amortization of capital dates, back, to 1920 – in the original text of the previous Law on Sociétés Anonymes (: Law 2190/1920). The Patriarch of the Law of Sociétés Anonymes I. Passias in the first volume of his monumental work (“The Law of the Société Anonyme”) referred to it giving its historical dimension.

    The legislative regulation of this issue, after more systematically dealing with it (in the second phase of its “life”), dates thirty-five years. Yet, despite its centuries-old life, this institution is, however, the least well-known and well-established institutions in the law of sociétés anonymes. And as little is known, so profitable it could prove to be for the shareholders. This is because in our country we “confuse” (often – without really needing) our pocket with the fund of our company, although there are other legitimate (and not just legitimate) ways of transferring liquidity from that fund (: of the société anonyme) in the pocket of his (the shareholders). In the broader known legal ways, one could include profit distribution and share capital amortization.

     

    So, what is the amortization of capital? Could it constitute a decrease?

    One of the legitimate ways of transferring liquidity from the company’s fund is also the amortization of the share capital. The legislator “felt” the need (albeit, as it is known, an insoluble one) to note, in one – separate paragraph of the relevant provision, that “amortization does not constitute a decrease of the capital”. But why did he need to make this specific clarification? Reasonable, as the question of “decrease?” was created in each of us when we first came into contact with this particular institution.

    Therefore, the amortization of the share capital does NOT constitute a decrease. The decrease of the share capital results in its reorganization – its dilution, i.e. by the amount decided by the General Meeting and its determination at a new, lower level.

    It is important to repeat that the amortization does NOT affect the share capital, which remains stable even after amortization.

     

    The conditions for the amortization

    The conditions for the amortization (partial or total of the share capital) are, just, two:

    (a) For the commencement of the relevant procedure: Decision of the General Meeting either with increased quorum and majority or (if there is a statutory provision) with a simple quorum and majority and

    (b) For the implementation of the relevant decision: Use of reserves or amounts of profits for the current year (see immediately below).

     

    The implementation of the amortization

    In accordance with the law, the amortization is implemented, by paying to the shareholders all or part of the nominal value of their shares. However, the specific payment is made (not with capital dilution but) by using special reserves that can be distributed. For the sake of completeness, this payment could of course also take place from the remaining profits of the year after the distribution of the first dividend, the formation of the statutory reserve and (of course) the payment of the due tax. Due to the fact that the money paid to the shareholder in the context of amortization is not taken from the share capital, its naming (“capital amortization”) is rather unfortunate. Rather right as it is the one that creates the above-mentioned reflection (: “i.e. decrease?”).

     

    Beneficiaries and the “price”

    Amortization does not (necessarily) benefit all shareholders. With amortization, it is possible to transfer liquidity from the company to either all or only certain shareholder / shareholders.

    It is said that “everything in life comes with a price”. Regardless of whether a person adopts this position in general, the “price” in this case is clear: Shareholders whose shares have been amortized retain their rights from the equity relationship but not those relating to their participation in the distribution of the first dividend and their right to reimbursement for their contribution if the company is liquidated.

    Therefore: The right to the first dividend is limited to those only from shares for which no amortization of their nominal value has taken place. The excess of the minimum dividend is allocated to all the shares, including those whose nominal value is written off. As regards the right to the distribution of the proceeds of the liquidation, the other shares (except for those for which the amortization) are preceded and then the excess is distributed in the totality of the shares (thus, the shares whose nominal value has been written off).

     

    The distinction of shares

    After the amortization of the nominal value of some shares, their share options are differentiated (better: diluted) in relation to the others. The protection of the rights of the remaining shares and of the bona fide third parties imposes (albeit not foreseen in the law) two alternative options: (a) the cancellation of the old (full rights) shares in combination with the issuance of new – with a respective note to their bodies or, more simply, (b) the note on the body of the specific shares of the amortization of their nominal value.

    In any case, the new shares (diluted by the aforementioned rights) are in practice and theoretically also called (incomprehensible to why so) “jouissance shares” – in addition to identifying them as common or privileged (i.e: “common jouissance shares” or where appropriate, “privileged jouissance shares”).

     

    The participation of “jouissance shares” in a possible decrease of the share capital

    The relevant question was put to the writer, in more than one case, by entrepreneurs who, with much interest, listened to the description of the particular institution. It is true that this particular issue does not seem to have been particularly dealt with in theory and by case law. On the occasion of the repetition of the relevant institution in the new Law on Sociétés Anonymes, as well as the discussions in the previous paragraph, diametrically opposed views were heard. I have no doubt that the better one is the one that recognizes the right of participation of jouissance shares in a consequential decrease of the share capital, which may take place with the return of part of the capital to shareholders. Argumentation in this direction has two very important axes:

    (a) The (non-disputable) wording of the law, which restrictively refers to the rights that the jouissance shares are deprived of (among which the right to participate in a decrease through the payment of a part of the capital to the shareholders, is not included) and

    (b) The fact that the return to the shareholders of the amortization product takes place either through the use of special reserves that are permitted to be distributed or by using profits for the current year after the first dividend and the formation of the statutory reserve – therefore the “share capital” account, which (in any case) remains unchanged after the amortization, is not used.

     

    The “restoration” of jouissance shares to the status before the amortization

    One more, extremely interesting, question the writer has accepted in one of the presentations of this particular institution is the possibility that jouissance shares returned to their pre-existing status. This question (due to the limited application of the institution) does not seem to have been dealt with by case law – nor in theory. But for the answer with (relative) ease, we could positively (that is, in favor of the validity) accept the assumption that such a possibility is not forbidden by law. However, reservations are made as regards the accounting management of the whole matter as the return (permanently) of distributed reserves does not appear to be an acceptable solution.

     

    In conclusion

    The institution of the amortization of the share capital is an old institution of the law of sociétés anonymes. However, since it has not become widely known, it has not received the adequate attention at the scientific and, most importantly, business level. As a result, it has not been sufficiently exploited. However, from the above, I do not think there is any doubt about its usefulness or the possibility of multi-level exploitation for the shareholders of the société anonyme.

    stavros-koumentakis

    Stavros Koumentakis
    Senior Partner

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (April 14th, 2019).

    aposbesh-kefalaiou

  • (Common) Founders’ Shares

    (Common) Founders’ Shares

    An old story

    In the 1990s, a businessman with a very good financial standing was deciding on his next business venture. He had no doubt (and rightly as it turned out) about his success. The whole venture, apart from the robust business plan, was based on two pillars:

    (a) multi-share scheme (through the involvement of robust financially shareholders); and

    (b) participation in the shareholding scheme of certain, high-level executives, with 10% of the total share capital – but without payment of money on their part.

    The share capital of the new, then, société anonyme was extremely high and the agreement with the other shareholders was simple: 90% of their holding would be transferred to the company’s bank account (to form the share capital) with themselves as depositors. The remaining 10% would be re-routed to the corporate bank account but with (alleged) depositors the aforementioned executives. This would achieve the realization of the design and the participation of these executives in the company’s share capital. And even without these executives paying their own money.

    It should be noted here that in the 1990s one did not know that such a design could be auditable as a donation (from the shareholders to the benefiting executives). Today, in such a case, we would have all the consequences, potentially negative or very unpleasant, (civil, tax and criminal).

    This business venture was a major success.

    Yet, with a small side effect: People’s relationships never, as a rule, prove to be eternal. And as I am accustomed to saying, people are likely to argue, to get sick or crazy. Additionally, surely, they will eventually die.

    (And) in this case determinedly some of the specific events have occurred …

    Since then, based on these negative experiences, I have deterred customers and friends from proceeding with such plans. Sometimes my suggestions were accepted and sometimes not. (Unfortunately)

    The law, however, did not provide for the tools it provides for today.

     

    Conflicting interests and the available solutions

    It is clear that, at a first level, the interests of the company and its executives are not in line.

    The business, especially the newly established, needs executives who will do their best to achieve its goal without, at the same time, being burdened with the high salaries they will look for. We also need executives who will share their vision and (if they achieve their goals – why not) be rewarded accordingly.

    The executives, on the other hand, look forward, and reasonably, to material and moral rewards. The participation in the company’s profits is an additional consideration not at all worthwhile. And not on a material level only.

    Of course, there is always the stock options solution with both positive and negative aspects – see the article about Stock options

    A solution, which is clearly more attractive in certain cases, is that of issuing Common Founders’ Shares.

     

    The (Common) Founders’ Shares

    This type of instruments/ shares allows considerable flexibilities to the founders.

    Some of the founders (: shareholders) will be involved in the creation of the company and the accumulation of the initial share capital.

    In some other (other than the founders or third parties – i.e. executives) it is possible to recognize through the (Common) Founders’ Shares the right to withdraw part of the profits of the société anonyme. And this without they themselves being shareholders. In other words, without having participated in the concentration of the initial share capital.

     

    The institutional framework governing the (Common) Founders’ Shares

    On the basis of the provisions of the new Law on Sociétés Anonymes (Article 75 of Law 4548/2018), the Common Founders’ Shares are provided to some of the founders (and / or to all) as well as to third parties. The reasoning for this benefit is defined as “reward for specific actions at the company’s establishment”. In fact, they cannot exceed 10% of the total number of shares issued.

     

    What rights do the (Common) Founders’ Shares grant and what they do not

    The exclusive benefit (yet not least, Article 75 par.3 of Law 4548/2018) of the (Common) Founders’ Shares is the right to an amount equal to (maximum) 25% of the net profits after deduction of the amounts for the statutory reserve (Article 158 of Law 4548/2018) and the minimum dividend (Article 161 of Law 4548/2018). And, what does this mean at a practical level? That those (founders or third parties) who, at the stage of the establishment of the société anonyme, have received (Common) Founders’ Shares, are:

    (a) entitled to receive ¼ of the excess of the minimum dividend. And this without contributing, to a minimum, to the concentration of the share capital and

    (b) not entitled to receive anything if the minimum (Article 161 of Law 4548/2018) or not (Article 159 of Law 4548/2018) dividend be distributed (Article 75 par.5 of Law 4548/2018)

    However, the (Common) Founders’ Shares, which have no nominal value, do not confer any additional rights on their holders (such as participation in the management and administration of the company, voting at the General Meetings, participation in the proceeds of the liquidation – Article 75 par. 2 of Law 4548/2018).

     

    Redemption Right

    It seems logical not to keep in the forefront the rights resulting from the (Common) Founders’ Shares. Moreover, the basis for issuing and delivering them to the founders (or third parties) is the “reward for their specific actions when setting up the company”.

    Thus, the (Common) Founders’ Shares may be redeemed by the company for a period of 10 years after their issuance (Article 75 par.4 of Law 4548/2018). However, the redemption may take place earlier if there is a provision in the articles of association.

    The cost of their acquisition by the company will be what the articles of association lay down. In any case, however, it may not exceed ten times the average annual dividend received over the last five years.

     

    Issuance, registration and transfer of (Common) Founders’ Shares

    The law deals with the specific issues corresponding to those mentioned in the shares (Articles 75 par.6 and 40 to 42 of Law 4548/2018). In this context, securities may be issued (in paper or in book format). At the same time, their registration may take place in a particular book (equivalent to the Shareholders’ Registry), which can be kept electronically. Their transfer (acquisition or succession) is free.

    It is the company’s articles of association that determines how to prove the status of the holder. The delivery to the company of the document for their transfer or the utilization of other means provided by the articles of association is, in any case, sufficient for the “legalization” of their holder. In the event of the death of the holder, the rights are inherited and recognized in the person of the person (s) who will prove their status as heirs.

     

    In Conclusion:

    Making use of the institution of the (Common) Founders’ Shares looks (and is) an excellent tool for the sociétés anonymes under establishment. This is because (inter alia) this particular institution:

    (a) recognizes the services that certain persons (founders, employees or third parties) provide at the establishment stage of a société anonyme,

    (b) rewards their specific services and links their rewards to the profitable, only, course of the company – without being required to contribute money to its share capital,

    (c) associates their holders with the profitable and developmental path of the business and identifies, to a significant extent, the interests of both (holders of (common) Founders’ Shares and business)

    (d) does not upgrade their holders to shareholders (with the result that their holders do not have the rights of the latter and, in particular, the voting and minority rights, the right to elect the Board of Directors, the receipt of the proceeds of the liquidation and so on)

    (e) limits the presence and rights of their holders in the company and determines / limits the amount of their compensation at the time of the redemption of the securities they hold.

    In other words: This particular institution can remove the reservations of the most skeptical, as the signatories, regarding the participation of specific persons (i.e. executives or third parties) in the business process and in the financial result of a société anonyme.

    stavros-koumentakis

    Stavros Koumentakis
    Senior Partner

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (February 17th, 2019).

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