We have already established that the establishment of a pledge on shares does not concern only the persons involved. It concerns, to a particularly significant extent, the SA itself. The same happens, correspondingly, with shares in usufruct. The regulations of the law on SAs (art. 54 law 4548/2018) are intertwined, here again, with those of the Civil Code and do not just concern us lawyers. It is necessary to take into account, both during the establishment of the usufruct and in the statute of the SA, the individual, often of decisive importance and value, “details”. It is also necessary to define them beforehand…
Regulation
The possibility of setting up a pledge and usufruct on shares is regulated, explicitly (and uniformly), in article 54 §1 of law 4548/2018. This is a regulation that corresponds in terms of its content to article 30a of the previous law 2190/1920. It is in harmonization with articles 1177 and 1245 of the Civil Code (see in this regard Explanatory Report law 4548/2018 on art. 54).
Furthermore, article 54 regulates the possibilities surrounding the exercise of the right to vote in cases of usufruct (§2). Also, the corresponding exercise of other, non-property rights (§3).
With reference to the property rights, for which there is no relevant mention in the regulation in question: these are determined by the law of usufruct (see related Explanatory Report of law 4548/2018 on art. 54).
Usufruct
Concept & Content
Usufruct constitutes, according to the law, a “limited right in rem”. It empowers the usufructuary to use and enjoy a foreign claim or chattel while keeping them intact. It also empowers them to enjoy the fruits of the material material thing. Regarding, in particular, the shares (the focus of the present article), as fruits are considered the dividend-beneficiary of which is the usufructuary.
Recommendation
The usufruct is established, more commonly, by contract or, more rarely, by adverse possession (1143 Civil Code). During its establishment, its multiple meaning should be taken into account. The participle denotes the title in which it is incorporated—it therefore falls within the meaning of the material thing. However, it simultaneously enshrines the shareholder right; therefore, it also falls under the concept of right. In the creation of a usufruct on a share, the general provisions of the Civil Code, either on the usufruct of a material thing or on the usufruct of a right, are applied, depending on the share on which it is created. Subject, of course, to the absence of a more specific provision.
In particular, the method of establishing a usufruct on shares is differentiated according to their individual distinctions (: nominal, intangible and anonymous -1074/2016 Multimember Court of First Instance of Athens, 534/2014 Multimember Court of First Instance of Athens, NOMOS Legal Database).
Regarding registered shares: For the creation of a pledge on registered shares, the provisions of articles 1178 of the Civil Code are applied. That is, the provisions for the usufruct of a right and, in other words, a claim. The establishment of a usufruct requires the agreement of the parties; in addition, delivery of the title to the usufructuary. In addition, however, registration of the usufruct in the shareholders’ book is required to “legalize” the usufructuary and his relative rights vis-à-vis the SA.
Regarding intangible shares: The creation of a pledge on intangible shares constitutes the creation of a usufruct on a right. Special arrangements apply – the further investigation of which is beyond the scope of the present article.
Regarding anonymous shares: Given the abolition of anonymous shares (as of 1.1.2020), the relevant mention is of historical value only. In case of usufruct on anonymous shares, the provisions on usufruct in rem (:1176 Civil Code) were applied. Specifically, an agreement of the parties and delivery of the prefecture, without obligation to follow formalities.
Exercise of Voting Rights of the Shares in Usufruct
One of the most important questions in case of usufruct shares is related to the exercise of voting rights. Who is entitled to exercise the right to vote at the General Assembly: the holder of the usufruct or the (bare) owner of the shares?
In case of shares in usufruct, the usufructuary has the right (unless otherwise specified) to participate in the General Assemblies (1177 of the Civil Code) and to vote in them.
Is a different agreement possible?
According to the law on SAs (art. 54 §2 paragraph a’): “Unless otherwise agreed, in the case of a usufruct…on shares, the right to vote in the General Assembly is exercised by the usufructuary ” (art. 54 §2 section a’). However, it is important to note that “the articles of association may prohibit an agreement to the contrary” (section b).
It is therefore possible:
(a) For the right to participate and vote in the General Assembly to belong to the beneficiary of the usufruct (: either in the absence of a special agreement between the beneficiary of the usufruct and the (bare) owner or in the presence of a corresponding provision in their agreement).
It should be noted here that this is also the significant difference between the case of the pledge and that of usufruct. Specifically, in the case of usufruct, the right to vote, in the absence of an agreement to the contrary, is not in principle borne by the shareholder (as in the case of a pledge) but by the usufructuary. This regulation is justified, if one takes into account the purpose of the usufruct. That is, the usufructuary’s benefit from the share right itself, in which the usufruct is established.
The beneficiary’s right to participate and vote in the General Assembly introduces an exception to the principle of the indivisibility of the share. And this, because it leads to the division of most of the rights that derive from the shareholding relationship.
(b) For the right to participate and vote in the General Assembly to belong to the (bare) owner: It is, however, presupposed that they have a relevant agreement with the beneficiary of the usufruct as well as the absence of a relevant statutory prohibition [although an extra-corporate agreement on voting rights between a usufructuary and (bare) owner]. The specific agreement, however, can take place either at the same time as the establishment of the usufruct or later. It is not required to be submitted to a specific form or publicity. However, especially for registered shares, the (bare) owner is legalized vis-à-vis the SA, as long as the agreement in question is notified to it and the corresponding entry in the shareholders’ book takes place.
Exercise of Other Non-Property Rights
Property and non-property (management) rights derive from the shareholding relationship.
Among the management rights of the shareholder: those regarding the participation and voting in the General Assembly. They are entitled, in the context of these, to be informed about corporate affairs and to control the management of the SA. Minority rights, according to the law, constitute a minimum guarantee.
The person who has the right to vote (art. 54 §§2 & 3) – in this case the usufructuary or the (bare) owner – is, respectively, entitled to exercise the non-property rigts of the shareholder (see Explanatory Report of law 4548/ 2018 on Article 54, where the following are listed indicatively: the right to appear at the General Assembly, to receive information and to cancel a General Assembly decision).
Increase in share capital
A question arises regarding the extension of the usufruct to the new shares in the event of an increase in the share capital. The answer to the question varies depending on the type of increase:
Upon a nominal increase, the usufruct on the new shares automatically occupies the new shares as well. The latter, moreover, are granted without compensation to the shareholders: the increase in question does not constitute an increase in the SA’s corporate assets but an accounting readjustment of its existing share capital.
On actual increase, there is an inflow of new assets into the SA (as opposed to the nominal equivalent). Intertwined with the actual increase is the exercise of the pre-emptive right of the shareholders: the (bare) owner is the one, and only them, who is entitled to exercise the pre-emptive right. Therefore, if the (bare) owner of the shares exercises the preemptive right, they are the one who acquire the new shares; however, the usufruct also occupies the specific, new, shares. It is possible, however, for this right to belong to the beneficiary of the usufruct- provided, however, there is a relevant agreement in place.
Obligations & Liability of Beneficiary of the Usufruct
The right to vote in the General Assembly is not exercised without restrictions when its holder is the beneficiary of the usufruct. The latter must not abuse it. They must also take into account the reasonable interests of the (bare) owner and also the purpose of the establishment of the usufruct (281 & 288 Civil Code).
In case of violation of the specific obligations of the beneficiary of the usufruct, it is possible to establish (intra-contractual and/or tortious) liability against them.
The establishment of a usufruct on shares does not only provide privileges to the usufructuary. It potentially constitutes a drastic intervention (with multiple/extremely significant consequences) in the operation and balance of the SA but also in the property of the (bare) owner-shareholder. It is necessary, therefore, to take the necessary provisions both within the framework of statutory regulations and during the establishment of the usufruct. The consequences, otherwise, can be potentially very problematic.
However, the consequences can also be problematic in case of loss or theft of the stock titles. On that, however, see our next article.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 9th, 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.