The (:ordinary or extraordinary) increase of share capital in Société Anonyme
“No Money, no honey” is a widely known expression. It is coming, most likely, from across the Atlantic. A phrase showing the necessary give-and-take in personal relations about to be realized. Or even existing ones. A phrase that shows in a crystal clear – and at the same time cruel- way, the value of money, according to common belief. Those who possess “money”, according to common belief -unfortunately, are the ones who are entitled to “honey”.
This does not only apply to human relations.
Those with the financial power in a professional cooperation, business joint venture or corporate relationship have or, eventually, acquire the “upper hand”.
The Société Anonyme could not be an exception to that rule.
ΙΙ. The necessary capital for the operation of the Société Anonyme
A necessary condition for the achievement of a company’s statutory objects, of course the SA included, is the adequacy of its capital. Both at its establishment and, of course, throughout its life.
In a previous article we looked at the initial Capital of the SA: amount, coverage, payment and certification. We also looked at issues concerning the contributions in kind in the initial capital of the SA. For achieving the corporate goals, the initial capital is, in most cases, not enough. Financial needs always appear in a company. Needs that may last for long, or not.
The main question is always the same. Share capital increase or external funding? The answers given in each case may and will vary. Depending on the facts, the needs of the company and its shareholders but also their abilities. The criteria may not be strictly financial. The increase of the share capital seems to have, at a first glance, more advantages. We see, though, that lending will often be consciously chosen by financially strong companies and shareholders. As a proof, for example, of the financial health or the good credit rating of the company. Or of the optimal use of its equity.
If a company chooses to increase its share capital, those who want in will follow. If they have the necessary funds.
What about the rest?
They will watch their participation in the total share capital decrease. And in some cases, be reduced to zero. And their participation in the expected economic outturn of the company reduced accordingly.
ΙΙΙ. The (sufficient?) justification of the share capital increase
It is not mandatory to justify the share capital increase. It is important, thought, to have a sufficient basis. If not, the Sword of Damocles is hanging above the validity of the relevant decision, due to abuse.
The cause for the increase cannot be other than the optimal achievement of the corporate goals. In no other case is the decrease (or reduction to zero) of the percentages of the minority shareholders allowed. The minority shareholders have the right to ownership, a right protected under the constitution. According to the European Court, they have: “indirect ownership over the company’s assets”.
It is possible that the majority shareholder may be aiming to decrease the participation of the minority shareholders in the company. In that case, the minority shareholders are not unprotected. The shareholder affected is given the option to go to court and claim the abusive character of the relevant decision. And, of course, to ask for the protection of their ownership. If the court accepts the relevant arguments, it can rule to cancel the decision for the increase of the share capital.
IV. The ordinary increase of the SA’s share capital
The decision to increase an SA’s share capital is usually made by the SA’s General Assembly. In this case, there should be an increased attendance quorum and an increase majority. This is called “ordinary increase” of share capital (Act 4548/2018, article 23). The ordinary increase of share capital in the most common one.
Having an increased attendance quorum means (article 130, par. 3) that the shareholders holding ½ of the share capital or their representatives are present. If an increased attendance quorum is not achieved, then a second meeting of the General Assembly must be held, which is valid if the shareholders holding the 1/5 of the share capital or their representatives are present (article 130, par. 4).
Increased majority means that (article 135, par. 2) the shareholders or their representatives who voted for a subject are 2/3 of the total number of votes represented in the General Assembly.
The articles of association can have provisions requiring higher percentages in order to achieve a quorum (article 130, par. 5) and a majority (article 130, par.3). But it cannot require the presence of every shareholder. Even more so, neither can it require unanimity.
V. The extraordinary increase of the SA’s share capital
The decision of the General Assembly, made with an increased attendance quorum and majority, is not the only way to increase an SA’s share capital -but this under one condition: a relevant statutory provision must be in place. If that condition is fulfilled, the SA’s share capital can be increased by decision of the General Assembly, with simple (not increased) quorum and majority. It is also possible to increase an SA’s share capital by decision of the board of directors with a majority of 2/3 of its members.
In cases like these, we are talking about an “extraordinary” increase of the share capital (article 23 Act 4548/2018).
It must be noted that an extraordinary increase of the share capital can be decided by the board of directors as well as by the General Assembly (article 24, par.5).
An extraordinary increase of the share capital always constitutes an amendment to the articles of association (contrary to what happened in the past). Furthermore: the extraordinary increase does not require an administrative approval. And all these, no matter if the decision is made by the General Assembly or by the board of directors (article 24, par. 4).
There is always the chance that the provision allowing an extraordinary increase will be used in bad faith. In order, for example, to mislead those transacting with the company. To avoid such actions, there it is strictly prohibited to mention to the press, in a commercial or in any document of the company, the amount up to which the competent body can increase the share capital (article 24, par.3).
VI. The power of the General Assembly to decide an extraordinary increase
We saw that a necessary requirement for an SA to make an extraordinary increase to its share capital, is the existence of a relevant provision in its statute.
For the first five years after the establishment of the company, the statute can give to the General Assembly the power to decide an extraordinary share capital increase (article 24, par. 2). This provision may allow the General Assembly to proceed to a share capital increase up to eight times the initial capital. What is noteworthy in this case is that the GA can decide the increase by simple quorum and majority.
But what is this simple quorum and what this simple majority?
The simple quorum of the General Assembly (article 130, par.1) requires for the shareholders holding 1/5 of the share capital, or of their representatives to be present. In case the quorum is not attained, a second General Assembly will be validly held, regardless of the number of the shares represented (article 130, par.2).
As for the simple majority, it is nothing but the votes of at least 50% plus one vote of the votes represented in a General Assembly (article 132 par. 1).
VIΙ. The power of the board of directors to decide an extraordinary increase
The board of directors has a power equivalent to that of the General Assembly, as long as there is a relevant provision in the statute, or a relevant authorization is given by the General Assembly. If any of these two requirements is met, an increase of the SA’s share capital up to three times the initial capital can be decided by the BoD. The relevant decision can be made by a minimum majority of two thirds (2/3) of all board members (article 24, par. 1).
The power for an extraordinary increase cannot be given to the board of directors by the statute indefinitely. It is only given for the first five years -maximum- from the establishment of the company. The share capital can be totally or partially executed by the issuance of new shares (article 24, par.1a).
Besides the statute, the General Assembly can also give the board of directors the power to decide for an extraordinary increase of the share capital. This power is given by the General Assembly for a period not longer than five years. If given, the share capital can be increased maximum up to three times the initial capital. In this case, the initial share capital is the share capital of the company at the date the relevant power was given to the board of directors (article 24, par. 1b).
The power of the board of directors can be renewed by the General Assembly. The General Assembly can give the relevant power to the board of directors for five years, maximum. The effect of each renewal can only begin after the end of the previous one (article 24, par.1c).
The decision for granting or renewing the power to the board of directors to increase the share capital must be published (article 24, par.1c).
VIII. Extraordinary vs ordinary share capital increase
We saw (above, under VI), that the General Assembly can decide for an extraordinary increase of the company’s share capital with simple (and not increased) quorum and majority. We also saw (above, under VII) that the board of directors can decide, very quickly, an extraordinary increase with a majority of 2/3 of its members, without having to convene a General Assembly.
But what do these options mean in practice?
The General Assembly has the right to increase the company’s share capital up to eight times the initial share capital,
and do so with reduced percentages. In other words: a shareholder holding, directly or indirectly, ½ of the share capital has the right to decide an increase of the share capital up to 8 times the initial one. And if they have the necessary funds? They additionally have the power to significantly expand their participation in the company and dramatically decrease the participation of the rest of the shareholders.
Under the requirement of achieving the necessary quorum in the General Assembly (1/2 or 1/5 of the total), a shareholder holding 13.34% of the shares has the right to decide an extraordinary increase up to eight times the initial share capital. In that case, provided they have the necessary funds, a minority shareholder can become the shareholder of a vast majority.
On the other hand, the implementation of an extraordinary share capital increase by the board of directors might help quickly achieve a certain corporate goal. Since there is no need for conveying a General Assembly, the procedure can be expedited at least by the number of days needed for the convention of the GA -in cases where we are not discussing a Universal General Assembly -which means presence of all the shareholders. Such a quick procedure can be proven valuable when fast response is required -i.e. exploitation of a significant business opportunity.
Respectively, though, a shareholder who “has” (or can convince or join sides with) 3/5 of the members of the board of directors (regardless the number of their shares), can “force” an extraordinary increase up to three times the initial share capital. And if, at the same time, they have the necessary funds to cover the increase, but the rest of the shareholders do not, they can at once become a major or a majority shareholder.
The regular increase of the SA’s share capital is decided by the General Assembly. It requires an increased attendance quorum and to be voted for by the majority of the shares. Essentially majority of 2/3 of the total number of shares.
The extraordinary increase must be provided for by a statute.
When decided by the General Assembly, it requires clearly reduced percentages. Half and, under certain requirements, 13.34% of the share capital could be enough for making such a decision.
When the extraordinary increase is decided by the board of directors, a vote for the increase by 3/5 of its members suffices.
Attention though! An extraordinary increase can be a useful tool for fast actions necessary to exploit business opportunities.
But it can also be a tool for overthrowing shareholding balances.
Possibly in the interest of the SA.
But always in the interest (:“honey”) of the powerful (:“money”) shareholders.
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (October 20th, 2019).