S.A. capital: Contributions in kind and valuating (or not) the contributions.
1. Preamble
“All some folks want is their fair share and yours”
– Arnold H. Glasgow – famous American businessman (1905-1998) who was successfully, for sixty years, in the humor magazine business.
There are quite a few people who are not satisfied with their fair share. They also want a part of your share – or maybe your whole share.
The business world and the world of SAs could not be an exception, since producing wealth generates or fuels greedy behaviors.
In a previous article, we saw the way the recent law on SAs tackles issues relating to the amount, coverage, payment and certification of the SA’s share capital.
What happens, though, when, instead of money, the shareholders’ contributions are made in kind?
How is their fair valuation (as a potential contribution to an SA’s share capital) ensured and how will potential voracious appetites of the contributing shareholder or, in some cases, of the rest of the shareholders, be handled?
2. Contributions in kind – forming an SA’s share capital
2.1. In General
According to the existing legislation on SAs (article 17, par. 1, Act 4548/2019) contributions in kind can be allowed as a means of contributing to an SA’s share capital. A contribution in kind is not like a payment in cash – but it can be valued in money.
Contributions in kind can be in the form of, among others, real estate (i.e. land, agricultural parcels, factories, buildings), movables (i.e. transportation vehicles, goods, raw materials, furniture) intangible assets (i.e. other companies’ shares, trademarks, patents), business branches or even businesses as a whole.
2.2. When can contributions in kind take place?
Contributions in kind can either take place at the stage of establishment of an SA, or throughout the time the SA operates. In the first case, there must be a relevant provision in the company’s statute. In the second, there must be a relevant provision in the decision of the company’s body deciding the increase of the share capital. In both cases, there must be a reference to the person that undertakes the obligation to make the contribution and the amount of capital and the number of shares the contribution in kind corresponds to.
2.3. Undertaking the obligation to execute works or provide services as contributions in kind.
There is a special provision in the current institutional framework for Private Companies (article 78, par. 1, Act 4072/2012) for the non-capital contributions, which are contributions that cannot be made in cash. According to this (and provided there is a relevant provision in the company’s statute) undertaking an obligation to execute works or provide services can constitute part of the Private Company’s capital (article 78, par. 2, Act 4072/2012).
Contrary to what is happening with Private Companies, when it comes to SAs contributions in kind can only be “assets that can be valued in money”. Special reference (in order to avoid any misunderstanding regarding what is mentioned in the abovementioned provision of article 78, par. 2, Act 4072/2012) must be made to the claims that the company has against the one who undertook the obligation to execute works or provide services: such claims are not (article 17, par. 2) assets that can constitute contributions in kind.
3. The valuation of contributions in kind
3.1. In General
The valuation of contributions in kind is not left up to the shareholders. This seems not only logical but also necessary, towards guarding the interests of the one making the contribution, the rest of the shareholders and, of course, the company.
There is a specific framework provided for the persons that can valuate the contributions, mentioning their incompatibilities, the content and the assumptions of the valuation report that will be drafted.
3.2. The valuators and the incompatibilities – the abrogation of the “Committee of Article 9”
In the pre-existing legislation (:article 9, Act 2190/1920) there was a provision that the: “verification of the value of the contributions in kind made to the company, at the stage of its establishment, as well as in case there is an increase of its capital, is conducted after the consultation is issue by a three member committee of experts, made up by one or two employees of the Ministry of Development – Sector of Commerce, or of the competent Municipal Authority, with a university degree and at least three years of experience, or by one or two chartered auditors-accountants and an expert from the competent Chamber”. We used to call this committee the “Committee of article 9” and to use it, in a totally dispatching way, for the drafting of the, required by law, valuation report of the contributions in kind. The credibility of its results was, always, low. In 2007 (with Act 3604/2007), an alternative was introduced for the drafting of that same report (valuation of contributions in kind) by a chartered auditor-accountant or an auditing company. The “Committee of article 9” has, wisely, been abrogated but its alternative survived.
Therefore, the only option (article 17 par. 3) for someone who needs a report of valuation of specific contributions in kind (either if the contribution is made when the SA is established or when its capital is increased) is to get that report drafted by two chartered auditors/accountants or by an auditing company or, depending on the case, by two independent certified valuators. The time that it can take for a valuation report to be issued must be less than 6 months, starting from the time the contribution in kind is made (article 17, par. 9). In case there are special circumstances, which require specialized knowledge or international experience, the auditors or the certified valuators can hire expert valuators, domestic or foreign, to valuate the assets contributed.
3.3. Publicity if the valuation report
The legislator recognizes the significance of the valuation report. To ensure transparency, the report must be submitted to the Hellenic Business Registry by the interested parties. The company’s Board of Directors is responsible for this submission (article 17, par.8 and article 13).
4. The incompatibilities of those drafting the valuation report
The persons who will be drafting the valuation report (or get involved with it in any way) cannot be any of the following (article 17, par. 4): they can’t be members of the board of directors of the company, they can’t have any business professional relation with the company or the person making the contributions in kind, or be their relatives up to the second degree or husbands or wives.
Specifically regarding the chartered auditors-accountants and the auditing companies they work for, there should be no obstacle or incompatibility, excluding them from conducting the company’s regular audit, and they should not have conducted the regular audit of the SA or of related to the SA companies in the last three years (Act 4308/2014, article 32).
5. The content of the valuation report
In any case of any valuation of an asset, values appointed can significantly vary. These values must be substantiated based on widely accepted methods of valuation. In order to strengthen the reliability and the usability of the valuation report, a set of rules has been established (article 17, par 5 and 6).
According to them, the valuation report has to include (article 17, par.5) a description of the contribution in kind, to mention the methods used to valuate and to come to conclusion, appointing a value (: final price) for the specific contribution. This final price of the valuation report is the highest limit the value the contribution in kind can have (article 17, par.7).
There are some additional rules regarding fixed assets (article 17, par. 6): the actual and legal status of these assets as well as burdens they might have (etc reconveyances, mortgages, pledges) must be taken into consideration and mentioned in the valuation report.
Specifically, regarding real estate, the value and the ownership titles, the marketability of the area they are in, their growth prospects, their current market values, their building permit and its relevant technical report from an engineer should also be taken into consideration.
When valuating machinery, vehicles and furniture, their year they were purchased in, their acquisition value, the degree of their use, their maintenance and tradability, their possible technology obsolescence and the current price for the same or similar assets should be taken in to consideration and referenced.
6. What if the contribution made to the company is not valuated?
Conducting a valuation report is, in general, obligatory.
It is possible for the company to avoid the valuation report altogether, if the statute or the decision of the company’s body deciding the share capital increase have a relevant provision and if:
(a) the assets contributed are money market instruments or securities (article 18, par. 1)
(In this case, they are valued in the weighted average price, at which they were traded on a regulated market, for the last six months, before the date of the contribution in kind.
(b) the assets contributed have already be valued by a recognized independent expert (article 18, par. 2)
(In this case, the valuation cannot have been done more than six months prior to the contribution in kind)
(c) the fair value of the assets contributed has been calculated and mentioned in financial statements of the previous fiscal year, providing these statements have been audited (article 18, par. 3) as part of the annual and consolidated financial statements (Act 4336/2015 and 4449/2017).
In each one of the abovementioned cases, the value of the assets contributed must (under certain circumstances) be readjusted. This readjustment will take place with the initiative and responsibility of the board of directors and a valuation report must be prepared. This is, i.e. when the weighted average price or, in some cases, the fair value of the contribution in kind is affected by external factors that can significantly change (or have already significantly changed) the value of those assets at the time the contribution in kind is made.
According to the above, the company can choose to avoid the valuation report. In this case, though, the board of directors of the company is obligated (article 18, par. 4) to submit to the Hellenic Business Registry, which will in turn publish, a series of evidence that substitute it. Specifically: (a) a description of the contribution in kind, (b) the value, why this value was appointed and, if necessary, the method of valuation, (c) a statement mentioning whether the value appointed is at least equal to the value of the shares issued in exchange for the contribution (number, nominal value, additional amount that one might have paid for the shares) and (d) a statement that there are no new circumstances since the initial valuation.
Contributions in kind can be decided during an (extraordinary) share capital increase with a decision of the board of directors (authorized by the statute or a decision of the General Assembly- under article 24, par. 1). In this case and under the condition that the contribution in kind is taking place without valuation-according to the abovementioned, a series of evidence must also be published to the Hellenic Business Registry, substituting the valuation.
7. In conclusion
The capital “intake” is a factor contributing to an SA’s health and it is boosting activities. The permission given to it by law to be capitally reinforced by contributions in kind, as well as the abrogation of outdated regulations (i.e. “the committee of article 9”) is a step to the right direction.
Setting strict rules for the valuation of the contributions in kind is, without a doubt, reassuring the justice among the shareholders and their rights. And moreover, it is discouraging those who “want their fair share – and yours”.
Stavros Koumentakis
Senior Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (September 15th, 2019).
