The distribution of shares (with or without consideration) to members of the SA Board of Directors, executives and employees is a modern and alternative way (additional-in-kind) of rewarding them for their services. The institution is not new. Its spread and development, however, in the Greek corporate world is due – one might say – to the (relatively recent) codification of the (existing, albeit scattered) relevant regulations with the law on SAs (art. 113 – 114 of law 4548/2018). The benefits are significant. And the risks, respectively, not insignificant.
Historical Review – Current Legislative Framework
The institution of the distribution of shares to members of the Board of Directors of the SA, to those, in general, who exercise management as well as to its employees, was introduced in Greece in the late 1980s. Since then, however, it has undergone multiple legislative interventions. The basic network of provisions was established, by authorization of no. 25 §2 of Law 1682/1987, with the Presidential Decree no. 30/1988. The latter contained regulations regarding the free allocation of shares to employees (“stock awards”), as well as the granting of options to acquire shares for consideration (“stock options”) – (see, in this regard, Memorandum to law 4548/2018 on art. 114).
However, the arrangements of said Presidential Decree for stocks options (it is rightly argued that) were implicitly abolished due to the special and detailed regulation of options by (previously enforced, now) par. 13.9 of law 2190/1920. On the other hand, until the entry into force of Law 4548/2018, the provisions of the above Presidential Decree remained in force, which were related to the acquisition and subsequent disposal by the SA of own shares as well as the issuance and disposal of shares from capitalization of profits (see in this regard, Memorandum to law 4548/2018 on art. 114).
Today, the possibility of establishing a “program for the distribution of shares to the members of the Board of Directors and the company’s staff in the form of an option” is enshrined in the law on SAs (Art. 113 Law 4548/2018). According to the Memorandum of Law 4548/2018 on the specific article, with the provision in question the (flexible) provisions of paragraphs 13 and 14 of Article 13 of Law 2190/1920 are repeated (as these were introduced by virtue of article 19 of law 3604/2007 and replaced the -mentioned above- 13.9).
As for the regulatory framework for the possibility of free allocation of shares (outside, that is, of a program), this was still being determined, as was said above, even after the implementation of par. 9 para. 13 of law 2190/1920, from the above Presidential Decree its related regulations, however, ceased to be valid, firstly, with the introduction of the current (today) provision of art. 114, Law 4548/2018.
According to the law (: art. 114 §4 ed. a΄4548/2018), the SA is allowed to decide on a combination of the above alternative share allocation systems. This particular solution serves, one might say, particularly the (intentionally unregulated – due to the complexity it would create) case of shares being made available by the company, not without consideration, but, simply, at a lower price than their nominal value (see Memorandum to Law 4548/2018 on Article 114).
The Systematic Integration of Current Regulations
The modern legislator decided to include the above distinct provisions on the allocation of shares, in the context of Law 4548/2018, in the section on the remuneration of the members of the Board of Directors.
Under the previous regime, the corresponding provisions were part of the share capital increase provision. The systematic inclusion of the now independent regulations on the distribution of shares in the section on the remuneration of the Board members becomes more correct under the following position: the distribution of shares does not require an increase in share capital. It is possible, on the contrary, to take place through already existing, own shares.
However, the above inclusion does not correspond to the following: Any shares (existing or newly issued) may be allocated to persons who are not members of the SA’s Board of Directors, but are part of its staff.
Clearly, the aforementioned inclusion raises the question of whether or not the other provisions on remuneration for members of the Board of Directors (and in general, for the directors of the SA) apply or not in the case of the sale of shares. Reasonably (it is argued that) the provisions on the disposal of shares are more specific and – in principle – prevail.
Given the above, it should be noted that in the context of art. 113 and 114, the concept of “advance” fees is not answered. And this is because, (as we will see in our next article), the time points for exercising the options (in the case of the “disposal program” of art. 113) or acquiring the free shares (of art. 114) are predetermined.
In addition, due to the increased-by-law collateral that governs the allocation of shares, there does not seem to be any room for judicial intervention, with the aim of reducing the remuneration of a member of the Board of Directors in accordance with what the law provides (: art. 109 §5 law 4548 / 2018). Such a decision would be in contrast with accomplished but also, probably, irreversible events. On a practical level: it would require, in practice, disproportionate and rather impractical remedial actions (: return of the allocated shares and, as a result, further disruption of the shareholding composition of the SA).
However, the possibility of applying the provisions concerning the remuneration policy (art. 111) and the remuneration report (art. 112) is not there. As for listed companies, in fact, there is, by law, an obligation to include in them (remuneration policy-report) the rights of those who exercise the management of the SA to participate in a share distribution program and/or to acquire free shares (art. 109 §1 and art. 110 §1). As for the other SAs, a corresponding obligation may arise on the basis of a statutory provision (art. 110 §1 ed. c΄).
It is possible that the distribution of shares to a member of the Board of Directors takes place on the basis – not of the organic one, but – of the possible, special relationship that connects them with the SA (e.g. work). It is considered more correct in this case to observe – along with the provisions for the disposal of shares – the special regulations regarding transactions with related parties (: no. 99-101 of law 4548/2018) .
Rationale & Purpose of Regulations
The distribution of shares to employees, members of the Board of Directors and/or to the persons, in general, who provide services to the SA constitutes a different (: distinct) method of their compensation and reward. This is, as a rule, an attractive tool for the (active) remaining of the beneficiaries with the company. However, it is also a tool for achieving goals and an important motivation for better quality performance. However, in this context, it is not excluded that the beneficiaries will be lured into making and executing potentially beneficial business decisions, with the aim of (both) achieving goals and (also) obtaining other-new shares. Such decisions entail, however, significant business risks – for which see below.
The beneficiaries of the shares expect (reasonably so) the consolidation of their relationship with the SA (also) on different/additional foundations – after their acquisition of shares of the SA but also the consolidation of the status of “shareholder-(co)owner”. The conflict of interest found between those who exercise the management of the SA and the SA itself (and its shareholders) is mitigated. Especially with regard to employees, the traditional relationship of dependence between them and the employer SA ceases to be the only link.
Additional “income” of beneficiaries and its payment
The main objective of the above institution (besides the creation of incentives for the beneficiaries – for the benefit of the SA), is not the increase of the property of the latter. On the contrary, it is the creation of an alternative (and supplementary) income for the beneficiaries. In fact, the payment of this type of remuneration by the SA – given that it does not constitute a salary or any kind of consideration or compensation – is particularly advantageous. And this is because it is not part of its fixed charges but is found at the time of the distribution of the free shares or the distribution of dividends to the shareholders.
On the other hand, the beneficiaries of the above distribution of shares look forward (secondarily) to the relevant “investment” and to its annuities (ind.: dividends). However, in any case, they look forward to the possibility of liquidation (and ultimately liquidation) in order to obtain any financial benefit. It is up to the future buyers of the investor shares to pay it. The beneficiaries are expected to collect the difference between the preferential (or non-existent) purchase price of the shares and the price of their future sale.
The allocated shares may be traded on a regulated market. The price that will be paid to the owners of said shares depends on their market value. Based (also) on this they will choose the time to exercise their right to sell – when they assess the benefit to be satisfactory.
The (not negligible) risks for SA and its shareholders…
The above-mentioned preferential distribution of shares (according to art. 113 & 114 of Law 4548/2018) can have significant (short-term, especially) benefits. Among them it is worth focusing on the boost (sometimes significant) of the profitability of the SA. Also, in the high yields for the beneficiaries. However, it is possible that, in the short and long term, such a preferential distribution of shares will be harmful to the company’s interests. Possibly, in fact, also cause a financial loss to the company and to the existing shareholders. In particular, when the disposal in question is done recklessly and/or without sufficient safeguards for the company and the shareholders.
To mitigate the associated risks, it is prefered that the decision to dispose of shares is based on realistic financial prospects. Accordingly, the (possibly) set goals should be realistic. Also closely monitor the company’s financial results as well as the business decisions taken by the beneficiaries. To closely monitor and evaluate, continuously, the performance of the latter.
…especially for unlisted SAs
As far as SAs whose shares are not traded on a regulated market are concerned, however, there are particular risks from the (future) liquidation of the shares that were the subject of the kind of the disposal in question by the SA. The members of the Board of Directors or the employees who acquired them will expect to benefit from their liquidation. This, however, is the most sensitive and dangerous point: Their potential buyers can be investors, shareholders of the SA itself – even its competitors. Moreover, we should not forget that the beneficiaries-recipients of the distribution of the shares are human beings; therefore: susceptible to death, legal incapacity, but also to changes in their feelings and commitments towards the company and its owners.
Accordingly, it is considered absolutely necessary that any incentives in favor of members of the Board of Directors or employees of the SA for the acquisition of its shares concern and not freely transferable shares – as long as these are companies with shares listed on a regulated market.
The free (or for a reduced consideration) distribution of SA shares to members of the Board of Directors, management, executives or employees, can become a valuable tool for boosting profitability and further development of the company. It is, in any case, an attractive tool for the recipients of the shares. But it is a given that, especially for SAs whose shares are not traded on a regulated market, the inherent risks are not at all negligible. And, in any case, it is imperative to address them. Regarding the procedure, however, and conditions for the disposal of the shares in question, see our next article.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 8th, 2023).
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.