We explored the concept of shares in our previous article. We saw, there, that the share denotes (among other things) the share relationship. We found that the shareholding status is acquired, originally, by taking at least one share during the founding of the SA or, in the context of a share capital increase, by issuing new shares (and in fact before the payment of the share capital). In the present article we will look into the prohibition of the original acquisition of the same shares by the SA: both during the establishment and during the increase of its share capital.
Meaning
The prohibition of original acquisition of own shares by the SA is provided for in art. 48 law 4548/2018. This is a similar regulation to that of art. 15b of the previous law 2190/1920.
The specific prohibition concerns the original acquisition by the SA of its own shares: (a) either through its founders upon its formation (b) or through the members of the Board of Directors in any increase in its share capital (c) or through a third (substitute) person, acting in the company’s name and on its behalf. Following are specific cases, which we will study in more detail.
Purpose
The prohibition of the original acquisition of own shares aims, first of all, at the actual payment of the SA’s share capital and at the preservation of its integrity. Any original acquisition by the SA of own shares through (obviously) the corporate property, would mean the coincidence of the status of creditor and debtor in the same person (depreciation cause-453 section a of the Civil Code). Also, the obligation to return the contribution paid. In other words: virtual payment.
The relative prohibition, therefore, aims to avoid the creation of an S.A. with (even if partially) virtual equity.
Through the preservation of corporate property, the satisfaction of corporate creditors’ claims is ensured, as far as possible. In addition, the shareholders (obviously the minority) are also protected by avoiding changes in the shareholding balances.
Cases of Prohibition (Scope of Application)
Acquisition of own shares during the establishment of the SA
During the formation of the SA, its founders undertake the full coverage of the initial share capital. They therefore acquire shares of the established SA. They are obliged, at the same time, to pay contributions of a value corresponding, at least, to the nominal value of the shares they undertake. This payment by the founders is intended to fulfill the obligation of the minimum share capital required for the establishment of the SA and the formation of the corporate property. It would not be possible, therefore, to allow the initial share capital to be covered by the SA itself (as it is not – art. 48 §1).
Such a (theoretical) possibility would create a double paradox. The SA, initially, would become a founder-shareholder of its legal entity/self -absurd. Also: the SA would end up being its own debtor – also absurd. Moreover, the coexistence of the properties of the debtor of the value of the shares taken up (here: SA) and the creditor of this value in the same person (the same SA) is not possible. On the contrary, it is a reason for the amortization of the debt due to confusion (453 section 1 of the Civil Code).
Any coverage, therefore, (even of a part) of the initial share capital by the SA, would only result in a virtual undertaking of its own shares. It would not entail, that is, the contribution of a new asset to its corporate property.
The prohibition of the original acquisition of own shares extends (exactly for the same reasons – Art. 48 §1) to the original acquisition of bonds convertible into shares. A special provision for the original acquisition of the same share certificates is found in article 57 §1 of Law 4548/2018.
Acquisition of own shares in an increase of the SA’s share capital
The ban on the original acquisition of own shares by the SA during the increase of its share capital is basically addressed to the members of its Board of Directors. Reasonably, because, through them, it is (theoretically possible) for the SA to acquire its own shares. At the same time, this relative prohibition, (among others) on the increase of the share capital, serves the same purposes as the corresponding prohibition during the establishment of the SA. In fact, it represents a more pressing need.
The increase of the share capital (with the exception of the nominal increase) is one of the main forms of financing of the SA. Through this, the inflow of new financial assets into the SA and the increase of its corporate assets is achieved. The specific purpose (of the financing of the SA) cannot be achieved, of course, by the acquisition/payment of the newly issued shares with resources of the SA. In case of, e.g., non-exercise by the existing shareholders of the pre-emptive right – combined with (non) payment of the necessary, new, contributions, the formed, new, share capital of the SA would be fictitious. In this way, there would be no influx of new financial assets.
It should also be noted that the relevant provision of Article 48 of Law 4548/2018 also covers the case of acquisition of own shares for the purpose of their subsequent offer by the SA to third parties.
Acquisition of own shares through a third party
It goes without saying that the original acquisition of own shares by a third party, acting in the name and on behalf of the SA-direct representative, is prohibited (art. 48 §1).
And so is the original acquisition of own shares by a third party, in their name but on behalf of the SA (indirect agent). Likewise, both during the establishment and during the increase of the SA’s share capital (art. 48 §2).
Such a (prohibited) tactic would lead to the acquisition of shares by a third party, albeit an agent, with the SA’s financial means. The third party, in this case, would be obliged to transfer the shares to the SA by virtue of the provisions on the mandate (in particular art. 719 of the Civil Code).
Possible Exemption
The prohibition of the original acquisition of own shares is admitted to be subject to one, and only, exception – in case of an increase in its share capital: in this case, the SA is entitled to take over, with its free reserves or profits, a percentage of the newly issued shares. This percentage must correspond to the total of its shares, which it acquired in a derivative manner and which are intended for distribution to its staff. Or to the staff of businesses connected to it.
Consequences (Penalties) of Violation of the Prohibition
Regarding the invalidity of the share capital coverage
The violation of the ban on the acquisition of own shares by the SA both during the establishment of the SA and during the increase of its share capital does not result, in an opinion we share, the invalidity of the coverage. Otherwise, there would be insecurity in transactions. The establishment or, respectively, the increase of the share capital, with the SA’s own resources, are considered valid. The SA acquires, as a consequence, its own shares for the first time.
Of course, it is supported by a small part of the legal theory that the relevant violation results in the invalidity of the coverage of the share capital (art. 174 Civil Code).
On the original, ultimately, acquisition of own shares, art. 49 §7 of Law 4548/2018: the SA is obliged, within one year from the acquisition of its shares, to sell them.
In the event, however, that the above-mentioned sale does not take place within the above-mentioned time, the own shares will eventually be canceled through a corresponding reduction of the SA’s share capital.
While, however, the SA retains its own shares, the rights deriving from them are, of course, suspended (in analogy to art. 50). Among them: the right to represent and vote at the General Assemblies – the shares, after all, are not taken into account for the formation of a quorum.
The liability (and exemption) of the persons involved
According to the aforementioned, there is no provision for invalidity of the own shares illegally (originally) acquired. In the event of a violation, however, of the relevant prohibition, a special responsibility is established for those involved (founders – during the formation, members of the Board of Directors – during the increase and any third parties): These persons are burdened with the obligation to pay the value of the shares taken up. The value is determined by their issue price (and not by their nominal value – art. 48 §3). If more than one person is involved, they are jointly and severally liable (art. 914, 926 of the Civil Code).
Corresponding liability is also created for third parties acting as indirect agents: they are considered to have taken over the disputed shares for their own account and are personally responsible for paying their value (art. 48 §2). At the same time, however, for reasons of guaranteeing the payment, in this case, joint and several liability is established with the indirect agent, founders or members of the Board of Directors (Civil Code 914,926).
Not distinguishing the law as to the required degree of culpability, it is inferred that the persons involved are responsible for any fault upon taking over own shares.
However, it is also possible to establish further criminal (art. 177 §3) and civil liability (art. 102 §1) of the members of the Board of Directors due to a violation of the relative prohibition of article 48.
The liable persons may be released from the responsibility of paying the value of the shares. A necessary condition is the proof of a lack of contributory culpability on their part.
However, in the case of more than one person at fault, if one of them is absolved, the others are still jointly and severally liable (914, 926 Civil Code).
Therefore, as a rule, the acquisition of own shares by the SA is prohibited both during the establishment and in the context of the increase of its share capital. The relevant violation is not without (significant) sanctions for the persons involved. But what happens in the case of the derivative acquisition (e.g. through purchase or donation) of own shares by the SA? Is it also prohibited or conditionally permitted? Regarding them, see our article to follow.
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (August 28th, 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.