Shareholding status (the corporate, that is, participation in the SA) presupposes the possession of shares. However, it is possible for the SA to issue, in order to serve its interests (for its financing – e.g.) other securities besides shares. Among the other securities are also the founders’ (: common or extraordinary), which serve the SA, the shareholders and also their owners on many levels. About the common and extraordinary titles, but also their particularities, the present.
Concept & Definitions
The possibility of issuing ordinary and extraordinary founders’ shares on behalf of the SA is expressly regulated in Law 4548/2018 (art. 75 and 76 respectively). This is basically a regulation similar to that of art. 15 of the previous law 2190/1920.
The issuance of these securities is intended to reward or attract the founders of the SA or third parties (e.g. employees, executives or members of its management), for specific actions beneficial to it, or, simply, synergies with it.
The distinction between ordinary and extraordinary founders’ shares is based on: (a) the nature of the benefit for which they are issued and (b) the time of their issuance. Particularly:
Common Founders’ Shares: These specific securities are issued by the SA at the time of its incorporation; their issuance at a later time is excluded (in the context, e.g., of any increase in its share capital). These titles are granted as an exchange/reward for services provided either by the founding shareholders or by third parties during the stage of the establishment of the SA (art. 75 §1). These services include actions that cannot be valued in money (e.g. providing work during the establishment of the company).
Extraordinary Founders’ Shares: Unlike ordinary founders’ shares, extraordinary founders’ shares can be issued at any time – both during the formation of the SA and during its operation. In addition to their time of issue, extraordinary founders’ shares are also distinguished from ordinary founders’ shares in terms of the nature of the benefit against which they are granted. The extraordinary founders’ shares constitute a reward of the shareholder or the third party for benefits in kind to the SA- valuators, however in money (art. 76 §1). In this case, it is enough to simply grant the object to the SA – the transfer of ownership, i.e., is not required. An object in kind does not, therefore, mean the payment of money nor benefits not valued in money (e.g. the provision of work – given the reference of art. 76 §2 to art. 17 on contributions in kind).
Rights
Both common and extraordinary charters have no par value. Their monetary value does not, therefore, correspond to a part of the company’s share capital; they do not provide share rights to their beneficiaries. Their holder does not have the right to participate in the administration and management of the company, nor in the product of its liquidation (art. 75 §2 and art. 76 §1 sub. b).
The only right they provide to their holders is the (limited) right to participate in the SA’s profits. The reward, in other words, of their owners presupposes a profitable, only, course of the SA – with which they are closely related.
The right to withdrawals in the extraordinary founders’ shares is limited in amount, based on what the statutes of the SA and also the law (art. 76 §3 & 159) define for the distribution of amounts to the shareholders. With regard to the common founders’ shares, an additional, quantitative, limitation is set (art. 75 §3): the amounts distributed to them cannot exceed ¼ of the net profits of the SA, after deducting the amounts for the formation of the ordinary reserve (art. 158) as well as the amount for the distribution of the minimum dividend to the company’s shareholders (art. 161). Therefore, payments against the above are illegal.
In order to ensure their right, which is exclusively of a property nature, the beneficiaries have, in addition, the right to attend the meetings of the General Assembly – without, however, the right to vote in them. They are also entitled to be informed about the property status of the SA, without, however, having a claim to see the corporate books.
Common Founders’ Shares
Conditions for Issuance
The exclusive reason/purpose of issuing the common founders’ shares, as pointed out above, may be the reward of the founder-shareholders or third parties for services provided during the establishment of the company. However, a relevant statutory provision is required, which should be detailed in terms of their beneficiaries (founders of the SA or third parties) and the services that are rewarded. It should also make an explicit reference to the number of founders’ shares issued, which cannot exceed 1/10 of the number of shares – calculated of any type (e.g. common or preferred shares) – (art. 75 §1). Finally, their duration, which may be indefinite, should also be determined; i.e. it should be identified with the duration of the SA itself – subject to their redemption.
The Redemption Right of the SA
As the common founders’ shares aim to reward their owners for their actions at the time of formation of the SA, it is reasonable for their rights to exist for a limited time. In this context, the -issuer of the founders’ shares- SA itself is entitled to purchase them. The redemption takes place after ten years have passed since their issuance; however, it is possible for the SA to redeem them even earlier, as long as there is a relevant statutory provision (art. 75 §4). The relevant provision of the law confirmed the already formed position of the legal theory, which accepted the possibility of redemption in a shorter period of time (see in relation Explanatory Report of law 4548/2018 on article 75).
The (statutory) right, and not obligation, to redeem the founders’ shares on behalf of the SA is formative right and is exercised unilaterally. In fact, the company’s right does not expire after the decade has passed, nor can it be limited or abolished.
The taking of the decision to redeem the common founders’ shares can belong to the General Assembly (preferable – as it is related to the property rights of the shareholders); however, it is also possible to assign it to the Board of Directors.
The purpose of the redemption is the cancellation of the founders’ shares against the payment of a consideration to their beneficiaries. The redemption consideration must be determined by the company’s articles of association and cannot exceed what the law stipulates (art. 159) for the distribution of amounts to shareholders. The exchange/price of the redemption may vary for each beneficiary. However, it is not allowed, under any circumstances, to exceed ten times the average annual dividend received in total by the beneficiaries of the founders’ shares during the last five years before the redemption (art. 75 §5).
Extraordinary Founders’ Shares
Competence of the General Assembly
As pointed out above, the extraordinary founders’ shares can be issued by the SA during its operation. The relevant decision, which amends its statutes, is taken by the General Assembly, with an increased quorum and majority (76 §2).
This decision of the General Assembly must be based (art. 76 §2) on a valuation report of the objects in kind that can be evaluated. Their valuation takes place with the corresponding application of what is provided for the valuation of contributions in kind (art. 17 and 18). In this way, the protection of the minority shareholders is achieved, as well as the control of any abuse of the relevant decision of the General Assembly. It should be clarified here, in any case, that the objects granted do not constitute contributions in kind and, consequently, do not form part of share capital of the SA.
The Free Of Terms
Contrary to what the law stipulates for common founders’ shares, the terms referring to extraordinary founders’ shares are freely determined (art. 76 §3). Depending on the time of issuance of the extraordinary founders’ shares (at the time of the formation of the SA or later), their terms will be determined either by its original articles of association or by a subsequent amendment thereof.
A maximum on the amount that can be paid to the beneficiaries of the extraordinary founders’ shares is what the law prescribes (art. 159) for the distribution of amounts to the shareholders. It is therefore valid to determine the participation in the profits of the holders of the founders’ shares, preferentially, before the distribution of the minimum dividend to the shareholders.
It should be noted here that the duration of the extraordinary founders’ shares is independent of the duration of the concession of the objects in kind. In fact, the right to redeem them from the SA is unlimited in time and can be exercised even while the aforementioned concession lasts.
Issuance, Registration & Transfer of the Founders’ shares
Matters related to the issuance, registration & transfer of common and extraordinary founders’ shares are treated analogically to those applicable to shares (art. 40-42, 75 § 6 and 76 § 4).
The issuance of the founders’ shares, in paper or accounting form, is optional and declaratory-legitimizing. The founders’ shares, if issued, are exclusively nominal. This is dictated, among other things, by the need for control and secure identification of the beneficiaries of the founders’ shares. The latter, in fact, in order to facilitate their identification, are registered in the special book kept, even electronically, by the SA, according to the standards of the shareholders’ book (of art. 40 § 2).
The transfer of the founders’ shares (in the context of special or universal succession) is free.
The common and extraordinary founders’ shares are an extraordinary, literally, tool in the hands of the SA, its founding shareholders and its management. They provide a limited right to participate in its profits to the beneficiaries – but without making them shareholders or offering them shareholder rights (e.g. minority, participation in decision-making, in the election of management, etc.). On the other hand: the beneficiaries enjoy, correspondingly, one of the most important equity rights (that of participation in profits), which under other circumstances they would not be entitled to. Consequently, the founders’ shares can be an excellent tool for attracting executives, partners, co-investors, but also for reducing costs for the SA; in the end: maximizing the benefit for its shareholders.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (November 27th, 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.