Koumentakis

Tag: stocks

  • Stock Option

    Stock Option

    Stock Option Plan for the distribution of shares to members of the Board of the Directors, employees and permanent associates

     

    A. Generally

    What are Stock Options?

    Stock Options are an institution for which there is no long experience in our country. At an international level, however, there is not only a long experience, but also a number of categories of same.

    Those that are most well known in Greece (and will be of interest to us here) are the ones that are intended to act as an incentive for senior and supreme executive staff. And in addition: the close-permanent associates of a business. Then, for reasons of brevity, all potential beneficiaries will be referred to as a whole as “executives”. The internationally accepted relevant terminology for stock options of this category is “Employee Stock Option” and abbreviated “ESO”.

    These Stock Options, in practical terms, are only the option that an executive (or a group of executives) of an enterprise acquires (at one or more subsequent times) the company’s shares in a predetermined, attractive, price. At a price that the executive himself/ herself is called to pay.

    Under the American model (:american options), this right is exercised at any time by the beneficiary, from the time of the issue of the Stock Option Plan up to its maturity. Under the European model (: european options or share options in the UK) this right is exercised by the beneficiary at the time of expiration and / or at predetermined, interim times.

    Any withdrawal /removal of an executive before the time at which the right may be exercised shall, as a rule, result in its loss.

    How do Stock Options work?

    First of all, let’s note that the Stock Options do not (and must not) concern all executives.

    But even with this constraint, we have to accept that the categories of executives to which they are addressed are two: To those which the company seeks to attract and those with whom it is already associated under some form of contractual relationship, more usually, labor.

    On the other hand, companies that decide to issue ESO can be of all kinds: Start-ups, businesses with a history (with liquidity problems or limited financial capabilities), businesses that are developing (and promising) or even developed companies (with significant financial capacity). A common feature of all: An attempt to motivate executives to either start or continue working with them.

    Both the core proposal of the company that decides to issue them and the specific parameters are known: “Come (or stay) with us and you will have serious expectations to derive significant benefits from the increase in the value of the business (in proportion to its part that corresponds to the stock option you receive)”.

    Internationally, it is adopted (at least in terms of listed companies) also one more alternative to (direct) ESO provision. The business undertakes instead of delivering the Stock Options to the executive to pay him money at predetermined times in the future. In particular, the difference in the present value of an agreed number of shares relative to the price they will have at those predetermined future dates.

    Stock Options on the side of the business and the executive

    With the adoption of Stock Options, the company creates significant incentives to attract an “expensive” executive, as it no longer faces him as a mere employee. The executive is upgraded from the level of the simple (and least important) employee to the potential tomorrow’s shareholder, a participant in the vision, development and, as a result, profitable course of the business.

    The enterprise (start-up, in difficulty, developing or developed) thus achieves a threefold goal: (a) to reduce the financial requirements of the executive in terms of his/her expected fixed earnings, (b) to increase his/her commitment to the firm (c) to raise (logically) his/her qualitative and quantitative performance.

    The executive, on the other hand, “attaches” stronger ties to the company’s chariot as is no longer a simple worker but upgraded to a potential (or tomorrow) shareholder. And even more: Looking forward to the profits he/she could make from his/her stay in the business, he/ she would hardly think of not paying off his/her full potential or leaving before the “full limit of the time”.

    By realizing the institution of Stock Options, the target of shareholders, management and executives becomes common: developing the value of the business and, consequently, the value of its stocks.

    Especially: The worries of the entrepreneur and the way they can be dispelled.

    However, there is also a serious (and quite reasonable) argument on the basis of which an entrepreneur (especially in companies with few shareholders) would not choose to make Stock Option available to his/her executives. Let’s note, among other things, the most common: What will happen if, once the relevant rights have been exercised, the executive (as a shareholder) leaves (resigns or be dismissed), bankrupts, dies or faces a mental health problem? Will then be as a partner an old friend and tomorrow’s enemy? Or will there be the widow and his orphans? Or maybe an insolvency administrator, someone irrelevant or even worse, the most important competitor of the business?

    In these critical questions can be given not only satisfactory answers but also absolutely adequate safeguards. The combination of individual legal options can safely succeed in achieving this.

    For example, the combination of stock options with the provisions on the issue of restricted stocks may create feelings of security for such concerns (For matters relating to the issue of restricted stocks, you may refer to our related article).

     

    B. The regulations of the new Law on Sociétés Anonymes

    On a procedural level, the issuance of Stock Options presupposes (Article 113 par.1) a General Assembly resolution on the beneficiaries of the plan (members of the Board of Directors, executives and / or persons providing their services on a stable basis) as well as on the details of such issuance. In this context, the decision of the General Assembly specifies (Article 113 par. 2) whether the Stock Options will be issued using the Company’s own shares or an increase in its share capital, the maximum number of shares to be issued, the subscription price or the method for its determination, the terms of sale of the shares, the duration and the beneficiaries of the plan, the manner in which the rights be exercised. However, especially with regard to the beneficiaries, the Board of Directors may be entrusted with the designation (by the Board of Directors) of either the beneficiaries, namely, or of the groups of beneficiaries

    The Stock Οptions issued may not exceed a maximum of 10% of the share capital (Article 113 par.2), although in practice it would hardly exceed even 1% or 2%.

    It is also noteworthy that the General Assembly may delegate (Article 113 par.4) for a period of five years its relevant power to the Board of Directors although such an assignment must be given sparingly as it could possibly lead to unpleasant reversals of sensitive balances between shareholders.

    In any event, the Board of the Directors is that body (Article 113 par.3) to:

    (a) issue the certificates of exercise of the relevant rights but also

    (b) (per calendar quarter) to either deliver the shares involved in the exercise of the Stock Options or to increase the share capital and amend the Articles of Association (by issuing and delivering the newly issued shares and certifying the relative increase).

     

    C. Epilogue

    Making use by an enterprise of a modern tool, such as Stock Options, can be beneficial at various levels. Although this approach is simplified, the potential risks to the entrepreneur can be reduced to a significant level (using safe legal tools) – if not eliminated. At the same time, the design of the relevant product can greatly safeguard the central focus of the business: whether it is to attract skilled executives or to maintain the most competent ones and / or to maximize what the benefiting executives are able to offer.

    stavros-koumentakis

    Stavros Koumentakis
    Senior Partner

    P.S. A brief version of this article has been published in MAKEDONIA Newspaper (February 3rd, 2019).

  • The new law on SAs: Issuing restricted stocks

    The new law on SAs: Issuing restricted stocks

    Is it an option of the law or a minimum guarantee of the (founding and other) shareholders and of the smooth operation and continuity of the société anonyme?

     

    Past experience

    It is well known that the Société Anonyme has always been (and remains by law) a capital company. In our country, however, it continues to have, in general, strong personal attributes.

    Founding (and non) shareholders always have a lot of concerns. One such is the possibility that one of the other shareholders (with whom they shared the “common dream”) would transfer its shares to a third party irrelevant to the original group. Possibly malignant and / or competitor. Where data permitted, we proceeded with statutory provisions based (primarily) on the needs of the main shareholder or, better, of the shareholder who had chosen us as his lawyers.

    These provisions were aimed at protecting the remaining shareholders from the potential surprise of the emergence of a new “partner”. An associate with whom the old shareholders owed (regardless of their personality and intentions) to coexist and co-create.

    These provisions usually referred to the recognition of the preference rights of the remaining shareholders when a shareholder externalized his intention to transfer his shares. Even more so: when the shareholder had already pre – arranged, with a proposed acquirer, the transfer of his shares. Sometimes even the architectonic proceedings that were chosen were intended to make a potential transfer of shares de facto impossible. Especially in the event that a specific shareholder would not approve it.

     

    The possibility of denying the requested authorization and the “red line” to the restrictions that can be set.

    The law on sociétés anonymes accepts, in the provision of Article 43, that the competent body of the company (Board of Directors or General Assembly) may refuse to approve the requested transfer. Hence, not arbitrarily but under a respective statutory provision (paragraph 1).

    The same provision (paragraph 2) introduces a systematic (but indicative) list of some restrictions that are possible but also tolerable on the basis of the Articles of Association to be borne by the company’s shares. For these restrictions, however, there is a significant, twofold, “red line” as it is not acceptable: (a) to make the requested transfer impossible; (b) for a quarter to expire without the company responding to a request of this respect, from the shareholder.

    In the event of a violation of the aforementioned “red” line, the company is obliged to buy the shares for which the request itself, in accordance with the procedure provided by the law. The relevant provision (Article 45) provides for the mediation of a court decision, the determination of the redemption price through this court decision, the possibility of the mediation of an expertise. Also, the threat of a company’s dissolution in the event of non-compliance with what said (court decision) orders.

     

    Restrictions and bodies of approval

    The respective provision of the law on Sociétés Anonymes refers to some more common restrictions that may be set in the Articles of Association with regard to the transfer of shares. This reference is indicative, as there is no restriction other than the pre-mentioned “red line”.

    The involvement of a company’s statutory body has always been (and still remains) already) given and necessary when there is a statutory provision on the future transfer of shares (based on a predetermined procedure). The General Assembly or the Board of the Directors (most commonly the last) was chosen as the body that would give the necessary approvals. Thus, the shareholder who had the majority of the votes in the General Assembly or of the members of the Board of Directors was the regulator of the relevant issue. The absolute, more or less, archon!

    Certainly, with the new law, things are not different. And this is reasonable.

     

    Potential restrictions

    The provision of art. 45 par. 2 provides for, indicatively, certain restrictions that may be imposed on a possible transfer of shares.

    In this context, the obligation of the shareholder requesting the transfer to offer the shares to the other shareholders or to some of them (paragraph 2, case a -recognizing their right of preference) is accepted. It is also defined as tolerable, the mandatory transfer of said shares, ONLY, to the one who will be indicated by the company (paragraph 2, case b).

    More interesting, at a legal and practical level, are the other two restrictions. The ones met in international terminology as Tag Along Right (par. 2, case 3), and Drag Along Right (par. 2, case d) as potential and tolerable constitutional provisions. Those which, we, with some originality and sometimes moving hand over hand, incorporated as statutory provisions or arrangements for an extraterrestrial shareholders’ agreement.

    In the first case (: Tag Along Right), the third-party potential share buyer is obliged to acquire a corresponding number of shares of other shareholders (and not only of the one with whom he initially “agreed with”).

    In the second case (: Drag Along Right) the remaining shareholders undertake the obligation to co-transfer to the third-party corresponding number of shares with the transferor.

    Experience has shown that these alternatives have often successfully tackled and resolved complex problems in respect with the relationship between shareholders.

     

    Statutory regulations

    The Company’s Articles of Association may (or not) provide for the existence of restrictions, such as above, in respect of share transfers. In the affirmative, it must regulate “the procedure, the conditions and the time limit within which the company approves the transfer or indicates a buyer”. In the event that such a period has elapsed, the requested transfer is free. Hence, if there is a transfer of shares in breach of the statutory provisions, the transfer is declared null and void.

     

    Abolition of transfer restrictions.

    Possible existing statutory restrictions on the transfer of shares do not apply unconditionally. Like, e.g. in the event of a shareholder’s death. Also, in case of attachment of his property, bankruptcy or other collective proceedings of transfer of his property. In such cases, it is possible to be statutorily provided: (a) the designation of a purchaser within one month starting from the company being informed of the respective event – the price is determined by the court or, alternatively, (b) the preference right of the other shareholders.

    The reasons for the abolition of the statutory restrictions as well as the statutory provisions for the respective management of such events are assessed as perfectly reasonable. The latter even ensure the company’s continuity within what the founding (or the subsequent) shareholders had envisaged.

     

    Corresponding (potential) restrictions also on bonds

    Respective restrictions with those mentioned above may be made by the decision of the competent body when a convertible bond is issued.

     

    In conclusion

    The statutory restrictions regarding the transfer of the shares of a société anonyme contribute effectively to the smooth operation of the company when one of the shareholders expresses the wish to transfer its shares.

    The relevant statutory provisions should, however, be reasonable and not lead to dead ends (since they will be self-defeating). Additionally: not to create the background of extortionate behavior by any of the shareholders.

    The new law provides us with the right tools.

    It is up to us to use them appropriately, along with the past experiences.

    stavros-koumentakis

    Stavros Koumentakis
    Senior Partner

    Υ.Γ. A brief version of this article has been published in MAKEDONIA Newspaper on Sunday, 20th of January 2019.

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