In a previous article we explored the prohibition of the original acquisition of own shares by the SA. In the present article we will look into the permissibility, under conditions, of the derivative acquisition of own shares by the SA and the legal status of the shares that are ultimately acquired by the SA.
Concept & Scope
The possibility of derivative acquisition of own shares by the SA is regulated in the law (art. 49 Law 4548/2018). This is a similar regulation to that of art. 16 of the previous law 2190/1920. However, instead of the administrative penalties, which were foreseen in cases of violation of the relevant conditions and procedures set by the previous law, there is now a criminal provision (see Explanatory Report of law 4548/2018 on art. 49).
The concept in question is broad. It covers, in principle, any acquisition, in a derivative manner, of shares – even if subject to a condition or deadline: with a definitive contract or preliminary agreement, by full or limited right of ownership but also by usufruct. It covers the expropriation as well as the promissory note. Finally, it covers the cases of acquisition, in a derivative way, of own shares through the SA itself through its competent bodies and through a third person, acting in its name and on behalf of the SA (: indirect representative).
Purpose, Risks & Protection
The acquisition, in a derivative manner, of own shares from the SA naturally involves risks. The payment of the relevant consideration by the SA may constitute a return of contributions to the existing shareholders (prohibited in principle). At the same time, in cases where the disputed shares are traded on a regulated market, their acquisition by the SA is likely to constitute an act of manipulation. While, in addition, the possibility of the Board of Directors to acquire these shares for the SA may disturb the equity balances, based on their potentially biased managerial choices.
Despite the above risks, however, the derivative acquisition of own shares by the SA reserves significant advantages for the latter. It is necessary, however, to establish strict conditions and procedures, by law, to minimize the associated risks. All of these are aimed at safeguarding the nature of the share capital vis-à-vis corporate creditors and at protecting the shareholding structure.
The derivative acquisition of own shares provided for by law serves legitimate business and financial interests of SA. It is often included in its investment plans and aims to improve its financial structure.
As a managerial act of the corporate property, it is implemented through the allocation of profits or free reserves of the SA. It does not, therefore, entail the reduction of the SA’s share capital and does not lead to a return of contributions to the shareholders. The SA, on the contrary, increases its flexibility and its adaptability to market developments (1832/2019 Court of Appeal of Thessaloniki sitting with three Judges – Qualex legal database).
Conditions for Acquisition of Own Shares
Adherence to the principle of equal treatment of shareholders
An essential condition for the permissibility of the derivative acquisition of own shares by the SA is the observance of the principle of equal treatment of shareholders of the same category (art. 49 §1, section a), in the sense of ensuring equal opportunities for their participation in the process of acquiring own shares from the SA.
It is argued, from a part of the legal theory, that any own shares acquired by the SA do not change the equity balances within the SA. Therefore, the principal in question does not grant the shareholders the right to dispose of their shares to the SA in accordance with the percentage of their participation in the company’s share capital. However, the opposite opinion is also supported.
Furthermore, reasons of superior corporate interest, as well as the possibility of shareholders waiving the protection of the specific principle, may justify any deviations.
Compliance with market abuse provisions
The next condition for the legality of the acquisition of own shares, in a derivative manner, is the observance of the provisions on the abuse of the market (art. 49 §1, section a’). This condition aims to prevent the risk of market manipulation by listed SAs.
The approval of the General Assembly
For the derivative acquisition of own shares, the law requires the “approval” of the General Assembly. The relevant decision is taken by simple quorum and majority (art. 49 §1, section a) and is publishable (art. 49 §1 section b). Approval is considered to be the prior permission or consent of the General Assembly (1832/2019 Court of Appeal of Thessaloniki sitting with three Judges –Qualex Legal Database) which must be provided, at the latest, until the conclusion of the promissory note. The subsequent consent (according to art. 238 of the Civil Code), is not accepted in this case.
The decision of the General Assembly must include, in particular: (a) the maximum number of shares to be acquired, (b) the duration of the granted approval and (c) the upper and lower limits of the acquisition value, in the case of burdensome acquisitions, with the determination of amounts or percentages.
The mention of the purpose of acquiring own shares remains optional, although crucial.
The maximum time limit for the approval of the General Assembly is set at 24 months. A decision of the General Assembly without specifying the duration of validity of the approval will be defective, and therefore invalid. The same consequence applies to exceeding this maximum time limit. Instead, it is possible to predict minimum time limits.
The date of the reception of the approval decision is considered as the starting date in case of omission of a relevant reference. It is possible, however, to set a later starting date.
If the General Assembly grands more authorizations to the Board, these will apply consecutively. Their renewal, before their expiry, is permissible in all respects.
The competence of the Board of Directors
The derivative acquisition of own shares, as an act of management and representation of the company, falls within the competence of the Board of Directors; it takes place under its responsibility – within the framework of the authorization provided to it.
The acquisition of said shares by existing shareholders, as a result of an individual or public offer (or through the stock market for listed SAs), presupposes (art. 49 § 2):
(a) The nominal value of the shares acquired by the SA to not exceed 1/10 of the paid-up share capital on the date of the decision of the General Assembly. The aforementioned shares include: (i) those previously acquired by the company and retained and (ii) those acquired through any indirect agent.
(b) The acquisition of own shares by the SA may not result in the reduction of equity to an amount lower than that prescribed by law (art. 159 §1). Therefore, the exclusive way of acquiring own shares – due to compelling reasons – is through the utilization of any undistributed profits of past corporate years or relative, for the specific purpose, reserves of the SA.
(c) The transaction may only be in fully paid up shares. This is an application of the principle of formation (payment) of the share capital.
Acquisition For The Benefit Of Employees
Special regulation governs the case of a predetermined, in the decision of the General Assembly, purpose of acquiring own shares in order to distribute them later – free of charge or against consideration (art. 49 §3): (a) to its staff and/or (b) to the employees of an affiliated company (within the meaning of Article 32 of Law 4308/2014). In principle, the aforementioned conditions apply – without, however, the quantitative limitation of 10%.
The contract on the basis of which the employees of the SA provide their services is not of interest -either if it is an employment, independent services, project or mandate contract. It is possible for the recipients to be members of the Board of Directors. In any case, the principle of equal treatment must be observed.
The distribution of shares, usually in exchange for employee performance, is done free of charge or for a price.
The distribution must also take place within twelve months from the date of acquisition of the shares by the SA. With the impracticable passing of the subversive deadline, the acquisition becomes problematic and may arise, under conditions, the obligation of the SA to transfer them within three years. But more on that later.
Variations in Conditions
Exceptions to the rule of strict conditions for the acquisition of own shares are the cases mentioned below (art. 49 §4). Under the condition, however, of not reducing the equity capital of the SA below the minimum levels set for by law (art. 159§1). Their characteristic: The decision of the Board of Directors and the absence of approval by the General Assembly.
The cases in which the acquisition of own shares is permissible, in more detail:
(a) for the purpose of implementing an (actual) capital reduction decision or due to a takeover (pursuant to art. 39),
(b) due to universal transfer of property – in the context of transformation (merger or division by absorption) or succession;
(c) as a donation of fully paid-up shares or from credit institutions and other credit organizations as a commission for a purchase;
(d) due to an obligation arising from the law or a court decision with the aim of protecting the minority shareholders; mainly, in the cases (art. 45) of a merger, change of objective or form of the company, transfer of the headquarters abroad or imposition of restrictions on transfer of the shares as well as the shares acquired for the purpose of satisfying the company’s obligations from a convertible bond loan,
(e) by auction with SA as the bidder and, therefore, confiscation of its own shares.
The maximum time limit for the SA holding the shares in the above, under (b)-(e), cases is three years (art. 49 §5) – on the condition that the nominal value of the total own shares exceeded 1/ 10 of the paid-up capital. The case under (a) is, however, expressly excluded from the relevant transfer obligation within three years.
Upon expiry of the above deadline, the transfer is impossible. The expiry also leads to the cancellation of the own shares with a corresponding reduction of the company’s share capital, following a decision of the General Assembly. The latter is taken by simple quorum and majority (art. 49 §6).
Illegal Acquisition; Liability of Board Members
The acquisition of own shares, in derogation of the provisions of art. 49, entails the obligation to transfer them from the SA (art. 49 §7). The transfer, in particular, must take place within a period of one year from the date of their acquisition. Otherwise, they will be canceled with a corresponding reduction of the SA’s share capital.
The members of the Board of Directors are liable on a civil (art. 102 § 1) and criminal level (art. 177 §3) against the company for any act or omission during the acquisition of the own shares. Further liability (due to a breach of another protective provision of law, e.g. the principle of equal treatment of shareholders, or the articles of association) is not excluded.
The Legal Status of Own Shares
In any way, direct or indirect, the acquisition of own shares does not provide the SA with the rights of shareholder status, which are suspended (art. 50 § 1). Therefore, the company is not entitled to the right to be represented and vote at the General Assembly. For the sake of preserving the share balances, the shares of the SA are not included in the formation of the quorum.
Furthermore, the dividends of the other shareholders are increased by the corresponding ones of the own shares. This happens to avoid confusion, as the SA cannot be, at the same time, a debtor and creditor of the dividend.
At the same time, in the event of a (non-nominal) increase in the share capital with new contributions, the corresponding right of preference increases, in principle, the right of the other shareholders. Unless the body responsible for the increase decides to transfer the right of preference to a person who does not act on behalf of the SA.
The suspension of the above rights applies until the own shares are transferred to third parties.
In addition, the management report, for the purposes of informing the shareholders, at a minimum includes: (a) the reasons for acquiring own shares, (b) the number, nominal value and the part of the share capital to which they correspond, (c) the value of shares upon acquisition or transfer, and finally (d) the number and nominal value of the total number of shares held by the company and the part of the share capital to which they correspond (art. 50 §2).
The derivative acquisition of own shares provides a series of important advantages for the SA – but also involves not negligible risks. It is therefore (and rightly) governed by a series of strict rules and restrictions, in order not to circumvent protective regulations in favor of the shareholders, the SA and its creditors. It should be further looked into, in the same context, the possibility (or not) of providing credit by the SA for the purchase of its own shares. Regarding this, however, see our article to follow.
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (September 3rd, 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.