An old story
In the 1990s, a businessman with a very good financial standing was deciding on his next business venture. He had no doubt (and rightly as it turned out) about his success. The whole venture, apart from the robust business plan, was based on two pillars:
(a) multi-share scheme (through the involvement of robust financially shareholders); and
(b) participation in the shareholding scheme of certain, high-level executives, with 10% of the total share capital – but without payment of money on their part.
The share capital of the new, then, société anonyme was extremely high and the agreement with the other shareholders was simple: 90% of their holding would be transferred to the company’s bank account (to form the share capital) with themselves as depositors. The remaining 10% would be re-routed to the corporate bank account but with (alleged) depositors the aforementioned executives. This would achieve the realization of the design and the participation of these executives in the company’s share capital. And even without these executives paying their own money.
It should be noted here that in the 1990s one did not know that such a design could be auditable as a donation (from the shareholders to the benefiting executives). Today, in such a case, we would have all the consequences, potentially negative or very unpleasant, (civil, tax and criminal).
This business venture was a major success.
Yet, with a small side effect: People’s relationships never, as a rule, prove to be eternal. And as I am accustomed to saying, people are likely to argue, to get sick or crazy. Additionally, surely, they will eventually die.
(And) in this case determinedly some of the specific events have occurred …
Since then, based on these negative experiences, I have deterred customers and friends from proceeding with such plans. Sometimes my suggestions were accepted and sometimes not. (Unfortunately)
The law, however, did not provide for the tools it provides for today.
Conflicting interests and the available solutions
It is clear that, at a first level, the interests of the company and its executives are not in line.
The business, especially the newly established, needs executives who will do their best to achieve its goal without, at the same time, being burdened with the high salaries they will look for. We also need executives who will share their vision and (if they achieve their goals – why not) be rewarded accordingly.
The executives, on the other hand, look forward, and reasonably, to material and moral rewards. The participation in the company’s profits is an additional consideration not at all worthwhile. And not on a material level only.
Of course, there is always the stock options solution with both positive and negative aspects – see the article about Stock options
A solution, which is clearly more attractive in certain cases, is that of issuing Common Founders’ Shares.
The (Common) Founders’ Shares
This type of instruments/ shares allows considerable flexibilities to the founders.
Some of the founders (: shareholders) will be involved in the creation of the company and the accumulation of the initial share capital.
In some other (other than the founders or third parties – i.e. executives) it is possible to recognize through the (Common) Founders’ Shares the right to withdraw part of the profits of the société anonyme. And this without they themselves being shareholders. In other words, without having participated in the concentration of the initial share capital.
The institutional framework governing the (Common) Founders’ Shares
On the basis of the provisions of the new Law on Sociétés Anonymes (Article 75 of Law 4548/2018), the Common Founders’ Shares are provided to some of the founders (and / or to all) as well as to third parties. The reasoning for this benefit is defined as “reward for specific actions at the company’s establishment”. In fact, they cannot exceed 10% of the total number of shares issued.
What rights do the (Common) Founders’ Shares grant and what they do not
The exclusive benefit (yet not least, Article 75 par.3 of Law 4548/2018) of the (Common) Founders’ Shares is the right to an amount equal to (maximum) 25% of the net profits after deduction of the amounts for the statutory reserve (Article 158 of Law 4548/2018) and the minimum dividend (Article 161 of Law 4548/2018). And, what does this mean at a practical level? That those (founders or third parties) who, at the stage of the establishment of the société anonyme, have received (Common) Founders’ Shares, are:
(a) entitled to receive ¼ of the excess of the minimum dividend. And this without contributing, to a minimum, to the concentration of the share capital and
(b) not entitled to receive anything if the minimum (Article 161 of Law 4548/2018) or not (Article 159 of Law 4548/2018) dividend be distributed (Article 75 par.5 of Law 4548/2018)
However, the (Common) Founders’ Shares, which have no nominal value, do not confer any additional rights on their holders (such as participation in the management and administration of the company, voting at the General Meetings, participation in the proceeds of the liquidation – Article 75 par. 2 of Law 4548/2018).
Redemption Right
It seems logical not to keep in the forefront the rights resulting from the (Common) Founders’ Shares. Moreover, the basis for issuing and delivering them to the founders (or third parties) is the “reward for their specific actions when setting up the company”.
Thus, the (Common) Founders’ Shares may be redeemed by the company for a period of 10 years after their issuance (Article 75 par.4 of Law 4548/2018). However, the redemption may take place earlier if there is a provision in the articles of association.
The cost of their acquisition by the company will be what the articles of association lay down. In any case, however, it may not exceed ten times the average annual dividend received over the last five years.
Issuance, registration and transfer of (Common) Founders’ Shares
The law deals with the specific issues corresponding to those mentioned in the shares (Articles 75 par.6 and 40 to 42 of Law 4548/2018). In this context, securities may be issued (in paper or in book format). At the same time, their registration may take place in a particular book (equivalent to the Shareholders’ Registry), which can be kept electronically. Their transfer (acquisition or succession) is free.
It is the company’s articles of association that determines how to prove the status of the holder. The delivery to the company of the document for their transfer or the utilization of other means provided by the articles of association is, in any case, sufficient for the “legalization” of their holder. In the event of the death of the holder, the rights are inherited and recognized in the person of the person (s) who will prove their status as heirs.
In Conclusion:
Making use of the institution of the (Common) Founders’ Shares looks (and is) an excellent tool for the sociétés anonymes under establishment. This is because (inter alia) this particular institution:
(a) recognizes the services that certain persons (founders, employees or third parties) provide at the establishment stage of a société anonyme,
(b) rewards their specific services and links their rewards to the profitable, only, course of the company – without being required to contribute money to its share capital,
(c) associates their holders with the profitable and developmental path of the business and identifies, to a significant extent, the interests of both (holders of (common) Founders’ Shares and business)
(d) does not upgrade their holders to shareholders (with the result that their holders do not have the rights of the latter and, in particular, the voting and minority rights, the right to elect the Board of Directors, the receipt of the proceeds of the liquidation and so on)
(e) limits the presence and rights of their holders in the company and determines / limits the amount of their compensation at the time of the redemption of the securities they hold.
In other words: This particular institution can remove the reservations of the most skeptical, as the signatories, regarding the participation of specific persons (i.e. executives or third parties) in the business process and in the financial result of a société anonyme.
Stavros Koumentakis
Senior Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (February 17th, 2019).
