Among the securities that can be issued by an SA are the warrants. Warrants are a modern financial instrument with an ever-increasing international popularity. They appeared in our country in the context of the recapitalization of Greek banks in the years 2012/2013 and on. Investors were then attracted (with warrants among others) to participate in their capital increases: by providing, i.e., the right to later acquire their shares – at a seemingly preferential price. However, they gained legislative support later – in 2018, with the inclusion of the relevant provisions in the law on SAs. Their history as well as international practice prove this, at least: warrants work in the direction of attracting investors and investment funds to the SA; therefore, there are highly interesting.
Concept-Content
Warrants are a form of securities, written or intangible, that embody or represent the (conventional) right of their beneficiary (: option) to acquire, with their own declaration alone, other securities – e.g. shares, for a pre-agreed price.
Warrants require the conclusion of an option agreement. This is the agreement between the beneficiary of the (formative) right and their counterparty, which describes the terms of establishment, exercise and amortization of this right.
Depending on the counterparty of the beneficiary, the title deeds are divided into:
(a) covered warrants, when the issuer of the right is a third party,
(b) corporate (: stock warrants), when the issuer of the right is the SA (art. 56 law 4548/18): through them the power of unilateral intervention and modification of the capital composition of the SA is provided.
The warrants for the acquisition of shares may be traded on a regulated market or MTF (art. 56 §1 sub. b). Therefore, the (subject to conditions) possibility of parallel trading of warrants and shares on the stock exchange is recognised.
Purpose of Issuance
It is said (partially jokingly) that the warrants are used as “sweeteners” to attract investors. Those, e.g., who choose to become shareholders of the SA are offered the possibility to acquire, at a future time and at a predetermined price, shares of the SA – even if their true/market/internal/stock price will be, then, significantly higher. To obtain, in other words, high profits.
Warrants are not only attractive to investors. By issuing them, the promotion of the SA’s corporate objectives is achieved, primarily, through the attraction of funds. They mainly serve business needs, strategic and development goals.
Consequences of Issuance
The decision to issue the warrants pursues (obviously) benefits for the SA as well. But it also carries (not negligible) risks – especially for existing shareholders. With the issuance of the warrants, their holders are given the possibility to increase the SA’s share capital, at a later point in time, by exercising the rights they grant them. This will mean, as an inevitable consequence, the change (possibly a reversal) of the shareholding relationships and balances of the issuing SA. The existing shareholders will, until the redemption of the relevant right of the holders of the warrants, be in uncertainty as to the occurrence (or not) of the relevant changes as well as their extent – in case they are realized.
The holders of the warrants until (and if) they exercise the rights deriving from them and acquire (if they acquire) the shares corresponding to them, do not for this reason have the status of a shareholder of the SA nor the related rights from the shareholder relationship (see e.g. participation and voting in the General Assemblies). It should be noted that in the event that they hold shares for another reason, they retain their share rights.
Conditions for Common Issuance
Competence
Regular Issuance
Issues related to the authority to issue warrants are regulated analogically to the corresponding provisions regarding the increase of the SA’s share capital.
The role of the General Assembly: The decision on the regular issuance of warrants is made by the establishing-extraordinary General Assembly (art. 56 §1 paragraph a’). The GA, therefore, decides on an increased quorum and majority.
The role of the Board of Directors: In the case of the regular issuance of warrants, the Board of Directors has a suggestive role, but of essential importance: it is the body that will present the reasons and purposes of the issuance, comment on the -reasonable or not- financial terms, submit its judgment on the suitability and appropriateness of the measure. It is not excluded, however, that the Board of Directors will acquire a more active role, as long as it is authorized so by the General Assembly to determine the sale price of the warrants as well as the exercise price of the built-in option – in proportion to the increase in the share capital (art. 25 §2).
Extraordinary Issuance
At the same time as the regular issuance of the warrants, their extraordinary issuance is also permitted (art. 56 §2). In this case, a relevant decision of the ordinary General Assembly with a simple quorum and majority or of the Board of Directors is sufficient. However, the analogical application of the provisions for the extraordinary increase of the share capital is required and, of course, the alignment with the relevant statutory provisions (art. 24 §§ 1, 2 and 5).
Approval of (the Class of) Shareholders
Other categories of shares may exist in the SA, in addition to the common ones (e.g. preference – art. 33 §2). For the legality of the decision to issue the warrants, the prior approval of the General Assembly of any affected category of shareholders is required, provided with an increased quorum and majority (art. 56 §4 and 25 § § 3 & 4).
Publicity And Administrative Approval
The decision to issue warrants has the characteristics of a conditional share capital increase. Both the issue and its terms are subject to the publicity rules that apply to the increase of the share capital (art. 56 §5) – but not to administrative approval.
Right of Preference of Existing Shareholders
Compensation for the adverse legal consequences to the detriment of the old shareholders in case of issuing warrants, constitutes the existence in favor of them of a right of preference – analogically to those that apply to the increase of share capital (art. 56 §6 and art. 26).
Reasonable interests of the company may lead, under certain conditions, to a limitation or even exclusion of the right of pre-emption (art. 56 §6, sec. b’, and art. 27).
Material Terms of Release
In the decision to issue warrants (no. 56 §3) should, basically, state:
(a) The time, the method, the possible price of issuing a warrant and the method of its payment. In this context, the extradition on the issuance must define how the issuance is to be covered (: the persons to whom it is addressed). Also, the monetary consideration for acquiring the warrant and the deadline for its payment. At the time of payment of the consideration, an equal, special non- distributable reserve is formed (art. 58). Granting of the warrants without consideration is not excluded. When, in particular, it results from another transactional relationship with the SA (e.g. acquisition of shares).
(b) The deadline for exercising the rights. This is the amortization period within which it is possible to exercise the beneficiary’s conversion right. A motivation for the acquisition of the warrants is the longest possible amortization period: while this increases their economic value, it acts as a deterrent to the entry of new investors through subsequent increases in share capital.
(c) The other conditions for exercising the option. The contracting parties, in particular, may associate the exercise of the option with further formalities and consequences.
(d) The class of shares to be issued. The category of shares, which the beneficiaries will be able to acquire, should fully comply with the statutory provisions regarding the type of shares that the SA can issue (e.g. preference shares) .
(e) The number of shares to be issued and their nominal value. In this way, the determination of the size of the “potential capital” of the SA is achieved. Also, the determination of the percentage of the beneficiaries’ participation in the capital.
(f) The value or method of calculating the value of the shares to be paid upon exercise of the right. The specific term refers to the exercise price of the option of the warrants: the price, i.e., that will be paid by the beneficiary of the warrants for the acquisition of the shares based on the option. The price must be fixed and paid in full. Its amount, however, should be at least equal to the nominal value of each share to be issued.
(g) The number of shares each security gives the right to purchase. This regards the determination of the so-called multiplier, with a key business interest for both the issuer SA and the holder of the security: it is the multiplier that determines the maximum number of shares that the beneficiary of the warrant will acquire if they fully exercise their option. Holding a security usually gives the right to own a share. It is possible, however, to provide a multiplier as a variable size or one less than a unit (<1).
(h) The adjustment of terms of warrants and rights in case of corporate actions. For the purpose of protecting the rights of the warrants throughout the usually long amortization period of exercising the option, it is possible to provide clauses to (fairly) deal with unexpected (or not) changes.
(i) Any other relevant detail.
Defective Issuance
Legal consequences
In the event of a defect during the issuance of the warrants, the regulations for defective resolutions of the General Assembly and Board of Directors shall apply, respectively (art. 137-139 and 95). Violations cause, as the case may be, invalidity or annulment of the relevant decision. It is possible, in any case, to temporarily suspend the validity of an invalid decision.
Responsibility of Board Members
The responsibility of the members of the Board of Directors for actions or omissions, regarding their proposal on the issuance of the warrants, is judged on the basis of the rules of diligent management (art. 96 et seq.). Decisions, however, issued by the Board of Directors without (or in excess of) the authorization of the General Assembly do not generate responsibilities.
Other Issues
Partial Coverage of Warrants
In the corporate decision for the issuance of the warrants, it is possible to provide for the possibility of partial coverage – in analogy to what applies in case of partial coverage of a share capital increase (art. 56 §7 and art. 28).
Nominal warrants
As is the case with shares, warrants are issued, exclusively, as nominal (art. 56 §8).
Assessment
An important feature of the warrants is their paper or intangible character – depending on the relevant statutory provision.
Beneficiaries of stock purchase certificates vis-à-vis the issuing SA are considered, in principle, those registered in the respective company books – unless it has been contractually defined otherwise (art. 56 §9 & art. 40-43).
The incorporation of rights in registered warrants has primarily a legitimizing/ declarative function for the holder of the warrants. The importance of their notation is enhanced when they reflect the more specific conditions for exercising the incorporated option.
Transfer And Encumbrance
The transfer of warrants is, first of all, permissible, free and non-casual (even if the shares to be acquired are to be earmarked). It is required, in any case, to enter into a contract of transfer and to register the successor (special or universal) in the relevant book. It is, however, possible to block the transfer of the warrants. It is possible (if not expressly excluded) to set up rights in rem on the warrants. It is required that they be notified to the issuer as well as the person entitled to exercise the option to acquire the shares.
The older and more widely known, worldwide, institution of warrants has already proven to be effective in our country as well: in the context of the aforementioned recapitalization of Greek banks. At that time, the funds necessary for their rescue were attracted, despite the fact that the conditions were not ideal or satisfactory. And since, under the extremely unfavorable conditions at the time, it proved to be effective, much more so it proves to be so in other, more favorable circumstances – in the context of the process and effort to attract investors & investment funds to SAs. In this light, their value has increased and their (further) utilization in our country is a given, even in the long run. And even in our SA to. Why not?
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 6th, 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.