We were concerned, in a previous article, with specific aspects of the SA’s share capital: its coverage , payment and certification . Also, its increase and decrease. We have already established that the SA’s share capital (needs to) be protected and safeguarded – due to its nature and purpose. This is why, in principle, there is in place a prohibition of returning to the shareholders their contributions – before the dissolution and (completion of) its liquidation. It is, however, permissible to return to the shareholders all or part of the nominal value of their shares during the operation of the SA, through the amortization of its share capital (Article 32 of Law 4548/2018). It is a (largely) unknown, multi-level , but beneficial option given by the law. The familiarization with its basic parameters is useful for this purpose.
Content And Nature Of Amortization
The (partial or total) amortization of the SA’s share capital allows its shareholders to collect from it part or all of the nominal value of their shares. And even while the SA is operating.
The institution of amortization does not in any way interfere with the above-mentioned prohibition of returning the contributions of the shareholders: the amounts paid to the shareholders correspond numerically to the nominal value of their contributions, but they are not identical with them. The specific, paid, amounts do not come from the pledged corporate property. They come, on the contrary, from a special reserve or from profits of the SA. For this reason, after all, capital amortization is an indication of its financial strength.
The amortization can also take place through a partial or total exemption of the beneficial shareholders from the obligation to pay the amount of the capital that they have covered, but have not yet paid (article 32 §3 in fine).
The legal nature of amortization has been the subject of theoretical debates. In the most correct view (and indeed helpful to its better understanding), amortization constitutes a peculiar distribution of profits.
Through amortization, the SA pays the beneficial shareholders free property in “consideration” for the amortization of two specific future claims against it. Specifically, the claims: (a) to the distribution of a minimum dividend and (b) to the return of the contribution as liquidation product (article 32 §4).
The distinction from the reduction of share capital
Amortization of capital is not a reduction of capital. This finding, in fact, is so important that the legislator itself deemed it appropriate to make a relevant explicit note (Article 32 §2) .
During the amortization of the share capital, as already mentioned, free property is paid to the beneficial shareholders. On the other hand, through share capital reduction, part of the SA’s reserved amount is released, corresponding to its share capital.
In the case, therefore, of amortization, the share capital of the SA remains unchanged, as a mathematical (: numerical) quantity. Therefore, no amendment of the articles of association is carried out nor (much more) the approval of the administration is required. The provisions for the protection of creditors on the occasion of the reduction of the SA’s share capital do not apply here.
The Amortization Process
Competent body
The competent body to decide the amortization of capital is the General Assembly (Article 32 §1). Its decision will only concern a specific, imminent, amortization (not any future ones), whose more specific parameters it will explicitly specify (full/partial amortization, sources of financing, etc.).
The General Assembly decides on the amortization, at first, with an increased quorum and majority. However, as long as there is a relevant (initial or consequential) statutory provision, the General Assembly can decide on capital amortization by simple quorum and majority. However, in the case of the (subsequent) amendment of the statute, the decision of the General Assembly regarding the amendment requires an increased quorum and a majority.
Content of Amortization Decision
As already mentioned, the decision of the General Assembly determines the more specific conditions of the amortization; it determines – among others: (a) The shares that are to be amortized (on the basis of the principle of equal treatment of the shareholders). (b) The amount of the nominal value per share – as it will be formed. (c) The methods of amortization. (d) The sources of funding. (e) The time of carrying out the amortization. Regarding, in particular, the methods of amortization and the sources of its financing, it decides on the following:
Methods of amortization
Amortization can be total (by paying, i.e., the entire nominal value of all the shares) or partial (by paying the entire nominal value of part of the shares or part of the nominal value of all the shares).
Funding sources
Funding for amortization can come (Article 32 §3):
(a) From Special Reserves:
The SA may proceed with the formation of special reserves in order to finance future amortization. The formation of the specific reserves may be provided for by the articles of association or by a decision of the General Assembly.
It is also possible that the SA will use its free reserves to finance the amortization. In this case, in principle, a decision of the ordinary General Assembly (which decides by simple, i.e., quorum and majority) is required. In the case of a statutory provision, regarding a different use of said reserves, it is necessary to amend it.
(b) From Free Distributable Amounts (Net Profits):
The SA can also use amounts that are allowed to be distributed (according to articles 159 and 160 of Law 4548/2018) to finance the amortization. Specifically: net profits resulting from the deduction of the regular reserve and the payment of the minimum dividend. Also: profits that have accumulated, due to their non-distribution, during the previous fiscal years.
Approval of More Classes of Shareholders
In an SA there may be more categories of shareholders. With the amortization of the capital, the interests/rights of some of them may be affected. The validity of the amortization decision will then depend on the approval of the shareholders who make it up.
Said approval is granted at a special meeting of the specific category of shareholders, which decides with an increased quorum and majority (Article 32 §5). For the convening of the specific, special, General Assembly as well as the terms and conditions for decision-making by it, the relevant provisions for the General Assembly of Shareholders apply (Article 32 §6) .
Publicity of the Amortization Decision
Capital amortization is of interest to those who do business with the SA as well as any prospective shareholders. It is therefore submitted to publicity formalities (Article 32 §1 in fine ). As the amortization does not require an amendment of the articles of association nor its approval by the administration, it is accepted that its publicity is simply declarative (and not constituent) in nature.
Amortized Shares
In case of amortization, the shares corresponding to the nominal value paid to their bearers are called “amortized”. In other words, it is about the “Usufruct Shares” – based on older terminology (as the Recitals of Law 4548/2018 clarify). However, this specific condition should not be confused with the right of usufruct, which is established on shares.
If shares are redeemed by an SA that issues equity securities, it is advisable to replace them with new ones with the indication: “amortized shares”.
Results of Capital amortization
As we have already pointed out, amortization does not constitute, literally, a refund of contributions. Therefore, unlike the reduction, its implementation does not result in the abolition of the shareholding relationship. It changes, however, the rights that this relationship produces.
Specifically, the holder of amortized shares retains their shareholder status and rights; with the exception of two: (a) the right to the minimum dividend and (b) the right to the proceeds of liquidation. Correspondingly, both, to the amortized nominal value of his shares.
In other words: for the unamortized part of the nominal value of their shares, the beneficial shareholders still retain, proportionally, the aforementioned two claims/rights.
The holders of amortized shares are entitled to any subsequent dividend, which may be distributed – in excess of the minimum. At the same time, in the event that there is a surplus after the satisfaction of the non-depreciated shares from the liquidation product, the depreciated shares also participate in its distribution.
Usefulness Of amortization
The SA’s capital amortization can prove to be particularly and on many levels beneficial. Indicative: it is possible to contribute to the return of liquidity to shareholders who need it. It is possible to work in the direction of redistributing profits among shareholders (since holders of amortized shares will not have access to the minimum dividend attributable to them) – but without differentiating voting rights and disturbing equity balances. It is also possible to operate in the direction of minimizing the investment risk and maximizing the investment benefit as the investor-shareholder can receive, even immediately, part or all of the capital invested in the SA. Finally, it can be used for tax purposes or in the context of tax planning.
The amortization of the share capital of the SA is an institution that is not widely known – even to those of us who are supposed to be experts (lawyers, accountants, tax experts, notaries, financial managers, consultants, etc.) on SA-related issues. Therefore, it is not utilized to the extent it should be. It is therefore up to all of us (those involved in the field of SAs – of course also entrepreneurs) to “revisit” the amortization of equity capital and take advantage of the related opportunities and possibilities.
And there are many!
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (June 5th, 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.