In a series of previous articles we tried to approach issues related to the acquisition of own shares by the SA. We established, there, the impossibility of their original acquisition and the, under conditions, tolerable derivation from this rule. We also dealt with the, in principle, impermissibility of providing credit to third parties by the SA for the acquisition of own shares. But what happens when an attempt is made, through third parties, to circumvent the specific prohibition on acquiring own shares?
Content
The acquisition of own shares by the SA through third parties is regulated by law (Art. 52 Law 4548/2018). This is a similar regulation to that of article 17 of the previous law 2190/1920.
The acquisition of own shares by the SA through third parties is, in principle, prohibited. And so is, in this context, (a) the establishment of a pledge to secure claims in favor of the SA on its shares or its parent company (art. 52 §1) and (b) the indirect acquisition of own shares of an SA through a subsidiary of the company (art. 52 §2).
The Lien Prohibition
Field of application
In order to prevent the indirect circumvention of the prohibitions mentioned in the introduction, it is prohibited for the SA to undertake its own shares, as well as shares of its parent company (art. 32 law 4308/2018), as collateral to secure loans granted by it or other claims (52 §1). Therefore, the specific prohibition does not cover the shares of other companies connected to the SA (e.g. sister companies).
The secured claim can derive, according to the letter of the provision, from a loan (article 806 Civil Code); however, in the most correct opinion, from any credit contract. It is therefore necessary for the SA to have, simply, the status of a secured creditor.
However, the specific prohibition does not cover own shares for which the SA has the status of depositary on the basis of a contract of deposit of own shares.
It is argued that this prohibition should not extend to the creation of a legal lien. It does, however, include any establishment of a contractual pledge: (a) simultaneous or subsequent to the creation of the secured claim, (b) primary or secondary and (c) in favor of a pledged shareholder as a debtor or as a guarantor of a third-party debtor.
The prohibition, however, is applied proportionally in the case of establishing a usufruct on own shares of the SA as well as on the fiduciary transfer of their ownership. In fact, in the latter case, all the provisions on pledge are applied.
Purpose
The above prohibition seems to be aimed at protecting corporate property. It is clear that the creation of a pledge, without consideration, does not, in itself, imply a reduction of the SA’s assets.
A risk arises, in fact, to the interests of corporate creditors and existing shareholders in case of non-collection of the secured claim. The SA will not be able to bid in the auction that will follow (as it will not be able to acquire its own shares). Most likely, however, a third party will not be interested in acquiring a minimum, minority, number of shares. And all this to the detriment, obviously, of the SA as any non-liquidation of the pledge will, possibly, make its secured claim uncollectible.
In addition, financial risks are also avoided in parent-subsidiary company relations (art. 32 of Law 4308/2014), to which the prohibition in question extends. Given, in particular, its administrative dependence, potentially damaging consequences to the detriment of the subsidiary company are prevented.
Exceptions
The creation of a pledge to secure loan claims on behalf of credit and financial institutions is excluded from the above prohibition (art. 52 §1 sub. b). The relevant transactions are, after all, part of their usual activity.
Exceptionally, it is also permitted to pledge shares of the parent company on behalf of the subsidiary company when, exceptionally and under conditions, the acquisition of own shares is permitted (art. 52 §3, sec. b’ and art. 49) – as long as the conditions in question can be met in the case of the pledge [: for excample the acquisition of a lien on shares through universal succession, ind.: merger (49 §4, para. b) ].
Legal Consequences
Unlawful Pledge & Liability of Board Members
The establishment of a pledge in violation of the above prohibition becomes invalid (174 Civil Code). This is absolute nullity. Therefore, this invalidity can be invoked by anyone who proves a legitimate interest. This invalidity does not, in principle, affect the insured claim (e.g. loan agreement).
The members of the Board of Directors are liable against the company, under certain conditions, for any prohibited creation of a lien on the SA’s own shares and shares of its parent company. They are personally liable for any act or omission. Their liability is, specifically, of a criminal (art. 177§ 3) but also a civil nature – as long as the violation caused damage to the SA (art. 102§ 1).
Legal Pledge By Exception
In the case of, exceptionally, a legal pledge (art. 52 § 3a) the provision of art. 50 §1, f. a’ applies (by express reference to art. 52 §4). As a result, the right to represent the pledged shares at the General Assembly is suspended. The right to vote of these shares is also suspended during their retention period – provided that this was previously contractually defined to be exercised by the secured lender. The shares, finally, are not included, in this case, in the formation of a quorum. They must, however, be included in the management report of the Board.
The Acquisition of Shares From a Controlled Company
The undertaking, acquisition or possession of SA shares by (directly or indirectly), a controlled company, even through an indirect agent, is considered to have been done by the issuer of the SA shares (art. 52 § 2a). Therefore, the acquisition of the above shares is, in principle, prohibited.
Subjective Scope
It becomes necessary, in principle, to determine the subjective scope of application of the ban, in terms of companies that are controlled.
A criterion is, in addition to holding the majority of voting rights, the exercise by the SA of “dominant influence” over the controlled companies. Companies with a parent-subsidiary relationship therefore fall within the scope of the provision (Art. 32 Law 4308/2014). In the same context, the acquisitions from “sub-subsidiary” companies (subsidiaries of a subsidiary) of SA are also included, due to their indirect control and dependence.
It should be noted here that the controlled company must be capital (: SA, Limited Liability Company, Private Capital Company, Limited Partnership by shares). When, in fact, its registered office is located in a country outside the EU, it is sufficient that its corporate form resembles that of the capital companies listed restrictively in the law (art. 52§2b).
In addition, any indirect representative of the audited company should be included in the scope of this provision.
Objective Field of Application
The equalization, by law, of the acquisition by the dependent/controlled company with the acquisition of shares by the SA itself concerns, in particular:
(a) in the acquisition by original acquisition (at the time of establishment or at the increase of the share capital) of shares of the dominant/parent company,
(b) in the acquisition, in a derivative manner, of shares of the dominant/parent company and,
(c) in the possession/direct control of the shares of the dominant/parent company in the context of e.g. usufruct or power of attorney to exercise the latter’s share rights.
This regulation also includes the public offering of the subsidiary company for the acquisition of the majority stake of its parent company.
Purpose
The immediately above simulation aims, exclusively, to protect the corporate property of the parent company. The (usual) absence of financial and administrative independence of the subsidiary company makes it a ballast to the interests and appetites of the parent company. In this case, this translates into the disposal of the controlled company’s financial resources to acquire shares of the parent company. In a logical sequence: invested, in the subsidiary, capital of the parent/dominant company is spent to acquire its own shares.
Thus, the following paradox occurs: the parent company pays its own capital – absurd. This way, the principle of the stability of the share capital is violated; the provisions for the acquisition of own shares are circumvented.
Exceptions
The above prohibition is not absolute. It should be noted here that acquisitions of parent company shares by a company controlled by it are permissible, in cases where the acquisition of own shares by the SA is permitted according to article 49.
The presumption, on the basis of which the acquisition of shares by a company controlled by the parent SA is equated with the acquisition of own shares of the SA, does not apply in the following cases (art. 52§5). Specifically, when:
(a) The controlled company acquires shares, as an indirect agent, on behalf of another person, who is not controlled by the parent SA – consequently, the legal effects of the acquisition accrue to that person.
(b) The acquisition of the shares is done by another company that professionally carries out operations on securities – subject to the observance of additional conditions arising from the law.
(c) The acquisition took place while the dependency/control relationship of article 52§2 did not exist between the companies involved. However, the subsequent establishment of the dependency relationship entails the legal consequences of the eventual acquisition of parent company shares, which are analyzed immediately below.
Legal Consequences
Acquisition in violation of the above is equivalent to the acquisition of own shares by the SA itself (art. 48 & 49) – depending on its nature as original or derivative. The corresponding consequences follow, as we have already developed in our previous articles. In summary:
By explicit reference to article 50 §1 f. a’ (art. 52 §4), the rights of representation and voting at the General Assembly are suspended, throughout the period of retention of the acquired shares (according to article 52 §§2, 3). In addition, the said shares are not included in the formation of a quorum.
On the contrary, the shares legally acquired by the subsidiary are included in the (applicable to the own shares acquired by the SA) limit of 1/10 of the paid-up share capital of the parent company. Finally, they are included in the management report of the parent company’s Board of Directors.
The liability issues of the members of the Board of Directors are regulated in accordance with what was mentioned above regarding the creation of a pledge.
The acquisition of own shares is, first of all – as we have already established – prohibited for the SA. Any attempt to circumvent this prohibition, through third parties or through a pledge, will be ineffective – unless someone moves within the limits of the law (or outside of them). However, we also find exceptions to this specific (prohibitive) rule; logical and, to a large extent, useful exceptions.
Shares, however, often remain an important asset. And as such, we are sometimes concerned with issues/problems related to respective assets: co-ownership, usufruct, pledge. About them, but also about their management, see our next article.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (September 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.