In our previous article we dealt with the share capital of SA. We had the opportunity to approach its undeniable importance for the existence, survival and development of the AU. We dealt, among other things, with its potential composition. We referred, regarding the latter, to the type of contributions (monetary and in kind) that may constitute the share capital. The latter (:contributions in kind), due to their importance and particularities, will be the focus of he present article.
Concept And Content
The concept of contributions in kind arises from the law itself (: article 17 of law 4548/2018). In fact, they are defined negatively (§1): These are those contributions “…that are not in money”. Furthermore, in fact, it is specified (§2) that “contributions in kind consist only of assets, which can be subject to a monetary valuation”. However, this position raises questions. And this is because all assets, without exception, can have a cash value (more precisely: they can be “measured” according to the Greek Accounting Standards – chapter 5, law 4308/2014).
The context of the valuation is sometimes clearer and specific and other times more blurred and debatable. Ambiguities and significant discrepancies are what the legislator wanted to limit. They therefore explicitly excluded from the contributions in kind those claims that are uncertain as to their fulfillment: claims which may be overestimated arbitrarily.
The following can also not constitute contributions in kind (§2), “…claims arising from the undertaking of an obligation to perform work or provide services”. This provision differs from those applicable in PCC. In the specific type of company, the contribution of work or services is permissible as a non-capital contribution (: article 78 of Law 4072/2012). The SA, on the other hand can, in a corresponding case, grant those who provide work or services (not shares but) founding securities. They become, in this way, creditors of the SA.
Examples of contributions in kind include, among others, the transfer of ownership or the concession of use of movable or immovable property, the transfer of rights, e.g. industrial property (: trademark, patent), of a business or a sector, receivables and securities.
The Determinants of Contributions in Kind
Any contribution in kind to the share capital of the SA presupposes (Article 17 §1) the reporting of specific information; specifically: (a) the type of contribution, (b) the person who undertakes the obligation to pay it and (c) the amount of the capital to which the specific contribution corresponds. The specific references take place in the articles of association (:if it is a payment of the initial capital of the SA) or, as the case may be, in the decision of the competent corporate body, General Assembly or Board of Directors, (:if it is a share capital increase):
At the establishment of the SA: The method of payment of the capital is included among the elements that constitute the minimum mandatory content of the articles of association (Article 5 §1, paragraph d’). Therefore, the mention of the specific information is mandatory. Failure to do so may, in fact, lead to judicial annulment of the company (article 11 par. 1, par. a’).
During the increase of its share capital: Negative legal consequences can also occur in the event that the decision of the body that decides on the increase of the share capital (Board of Directors or General Assembly) omits to mention the aforementioned information. These decisions are subject to nullity (articles 138 on the General Assembly and 95 on the Board of Directors).
It should be noted, however, that in the event that the articles of association or the decision to increase the share capital “…does not define the category of contributions (that is, whether they will be in money or in kind), then it is considered that all contributions are in money” (ind.: 2331/2006 Court of Appeal of Thessaloniki).
The Obligation for Valuation
A condition for the valid payment of contributions in kind is their valuation, the “official”, i.e., verification of their value. The specific verification takes place when the contribution is made (during the formation of the SA or, as the case may be, the increase of its capital).
The estimation of contributions in kind aims to avoid the risk of overestimating these contributions and creating, in excess, a fictitious share capital.
Competent Persons
The legislator particularly aims at the reliability of the persons who will carry out the valuation of contributions in kind. Therefore, they provide that the valuation report is drawn up “…by two chartered accountants or an auditing firm or, as the case may be, by two independent certified valuers” (Article 17 §3).
Through the assignment of the valuation to the specific persons, Law 4548/2018 aims, and rightly so, to reduce the state supervision of the SA. In order to achieve this goal, after all, they proceeded to the necessary abolition of the (known, of dubious reliability and, in any case, obsolete) Committee of article 9 of Law 2190/1920 (ie: the three-member assessment committee, which was most commonly composed of civil servants). The latter was tasked, however not exclusively – under the previous regime, with carrying out the valuation.
Furthermore, it becomes permissible for chartered accountants or certified valuers to hire special valuers, domestic or foreign, for the valuation of assets that require specialized knowledge or international experience.
Avoiding Conflicts of Interest & Ensuring Independence
The legislator wanted, reasonably so, to ensure the reliability of the assessment of contributions in kind. They sought to avoid a conflict of interests of the persons carrying out the assessment. Also, to safeguard their independence and impartiality.
For this purpose, they provided for a series of requirements, which cannot be bypassed by the aforementioned competent persons. Specifically, these persons cannot: (a) be the ones making the contribution in kind, (b) be members of the board of directors of the SA, (c) maintain a business or have other professional relationship with the company or the contributor or (d) be related to the specified persons up to the second degree or being their spouses.
Furthermore, the law provides that: (e) “…for the chartered accountants and for the auditing companies, of which they are members, there must not be any obstacles or incompatibilities that would preclude the carrying out of a regular audit by these persons, nor can they have carried out the regular audit of the company or of a company connected to it…within the last three years.” (article 17 §4).
Content of Valuation Report
The Valuation Report should, by law (Article 17 §5) contain: (a) the description of each contribution in kind, (b) reference to the valuation methods applied – the choice of which is left to the appraiser and (c) the opinion for the value of each contribution. In fact, in the event that the valuation results in a price range, the report must indicate a final price.
Furthermore, the law specifies the factors to be taken into account in the report for the valuation of fixed assets (Article 17 §6). The characterization of an element depends on its continuous use by the company (which must exceed a one-year period-law 4308/2014, Annex A΄). The price at which the valuation report ends is the highest possible price, with which the contribution in kind may be equal to (Article 17 §7).
Duration of Utilization of the Valuation Report
The payment of contributions in kind, based on the valuation report, may not take place after six months from the time of its drawing up. If the six-month period expires, a new valuation should take place so that the payment of contributions in kind is not affected (Article 17 §9).
Publicity of the Valuation Report
Valuation reports of contributions in kind must be published in the Business Registry. The ones concerned are responsible for the publication. It is noted, however, that each valuation report is sent directly to the Business Registry, without being subject to any approval or acceptance by the Administrative Authority (: Recitals of n. 4548/2018 on article 17). It is also underlined that, for new companies, the publicity takes place simultaneously with the registration of the company in the Business Registry (article 17 §8, section b).
Exemptions from the Obligation for a Valuation Report
Valuation of contributions in kind is not mandatory in every case. The provisions of article 18 of Law 4548/2018 provide the SA with the possibility to avoid, if it so wishes, the valuation of specific assets that are being contributed (see immediately below). This possibility is provided both during the establishment of the SA and in any increase of its capital. It is decided, respectively, either by the founders in the SA statute or by the body that decides on the increase.
This specific (facilitating) possibility is provided in three cases, only and if the special conditions provided for by law are met. In particular, no valuation is required when the subject of the contribution in kind:
(a) They are money market instruments or transferable securities.
(b) Are assets, other than transferable securities or money market instruments, which have already been the subject of a valuation for their fair value by a recognized independent expert.
(c) They are assets, other than securities or money market instruments, the fair value of which is determined, for each of them, from the Balance Sheet of the previous financial year.
A common feature of the above exceptions is the fact that the value of the contributed assets has already been determined by reliable sources. A new valuation is required, however, in the event that since the time of calculating the value of the assets contributed, an event affecting their value has occured.
As long as contributions are made in kind without valuation, the Board of Directors is obliged to make a declaration, which contains clarifying data (Article 18). This statement aims to inform any interested parties and must be made within one month of making the above contributions. In case of omission, responsibility of the members of the Board of Directors arises.
The Risks For SA, Shareholders & Creditors
Through the strict regulations, as analyzed above, the legislator sought to minimize the risks deriving from contributions in kind. Some of them:
(a) Risk of overvaluation of the contributions in kind and the (total) share capital: Any overvaluation would result in the (true) value of the contributions falling short of the apparent value, which would affect the (final) value of the share capital. This possibility carries risks, especially for the creditors of the SA.
(b) Risk for minority shareholders: Majority shareholders may resort to contributions in kind, with the aim of reducing (or eliminating) the presence, initially, and then expelling the minority. However, such a decision could, under certain conditions, be evaluated as abusive (and, therefore) voidable, in the event that it proved not to serve the corporate interest.
(c) Risk for the interests of third parties and in particular, lenders of the SA: through the so-called hidden contributions (: during the establishment or increase, a contribution in money is first paid, which is, however, returned to the contributor through the conclusion of a transfer contract to the SA of a specific asset in order to avoid valuation). In order to reduce this risk, specific restrictions and prohibitions are set by law.
Indeed, in order to avoid this specific risk, it is prohibited, in principle, for the SA to acquire, within the first two years of its establishment, its own assets (Article 19), when the sellers are: the founders, shareholders representing a percentage more than 1/20 of the paid-up capital or members of the Board of Directors, persons related to them or persons controlled by them. Also when the seller acquired from these persons during the last 12 months before the transfer. It should, however, be noted that the limited scope of the above prohibition does not adequately cover the risk in question.
There can be no doubt that the adequacy (even better: the excess) of the share capital in the SA is a factor showing the health of the company: It facilitates the achievement of its statutory purposes and also its development. It increases its creditworthiness and makes it more attractive to potential investors. It always facilitates the administration in its work and, on multiple levels, promotes the interests of its shareholders.
Things are simple, if not self-evident, when the contributions that make up the share capital are monetary; they are complicated when they are in kind. Especially with regard to the last case (:contributions in kind) for the protection of the company, the shareholders (minority as a rule) but also the third-party lenders, a series of conditions are set, by law – and rightly so, in order for them to be incorporated into the share capital. The question is, always, the health of the business. It is therefore desirable not only to support its capital, but also to faithfully (substantially – and not only “superficially”) apply the rules governing the integration of contributions in kind. The benefit will be, in this case, multi-layered. Besides, contrary practices or lack of compliance not only harm the business (among others), but can also be successfully tackled by the law.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 13th, 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.