In a previous article we focused on the pre-emptive right in the case of an increase of the share capital of the SA. We approached its concept and legal nature, its beneficiaries and its exercise procedure. We have seen what happens when the right is not exercised at all or partially exercised. Here, closing the section related to the pre-emption right, we will analyze its most important issues: the possibility and conditions of its limitation and exclusion (=cancellation). Also, its protection.
Limitation And Exclusion Of Preemption
The possibility of limiting or excluding the right of pre-emption is regulated in the law on SAs (Article 27 Law 4548/2018). In fact, it concerns the limitation or exclusion of this right in view of a specific increase in share capital. No, that is, of the pre-emption right as an abstract right. For this reason, after all, the possibility of limitation or exclusion cannot be provided for in the statute. On the contrary, on a case-by-case basis it is decided (or not decided) by the General Assembly or the Board of Directors, as analyzed immediately below.
Given the importance of the right of pre-emption, certain formal conditions must be met in order to limit or exclude it. Specifically, (a) a decision is taken by the competent body and (b) a report is drawn up by the Board of Directors.
(a) Decision of Competent Body
From a General Assembly with an Increased Quorum and Majority
“By decision of the general assembly, taken with an increased quorum and majority, the pre-emption right may be limited or abolished…” (article 27 §1, section a’).
The General Assembly, which decides on the regular increase of the SA’s share capital, also has the power to limit or abolish the right of pre-emption.
Does the limitation or exclusion of the right of pre-emption need to be listed as a separate item on the agenda of the SA’s General Assembly? Or is it sufficient to make a decision as part of the discussion and decision to increase the share capital? The issue proves to be important as a possible decision without specific reference to the agenda could(?) lead to invalidity.
However, jurisprudence accepts that “…The purpose of the agenda is not to create a rigid and abstract formality…Thus, there is no need for special mention in the agenda of matters which are in such a close internal relationship to the announced matters of the agenda in the transactional practice, so it cannot be considered that they go beyond this formalism. Thus, it is accepted that the decisions limiting or abolishing the pre-emption right are also considered relevant or related to the previously announced agenda items…(Multimember Court of First Instance of Athens 5182/2007 ECJ 2008.323 and the references there to theory and jurisprudence)” ( ind.: 5885/2010 Multimember Court of First Instance of Athens) , NOMOS Database).
From the Ordinary General Assembly or Board Meeting
The law on SAs introduces a significant change compared to the previous law. It provides, specifically, authority for the body that decides on the extraordinary increase of the share capital (: the ordinary General Assembly or the Board of Directors) to also decide on the limitation or exclusion of the pre-emptive right: “the articles of association or the decision of the general assembly that provide extraordinary authority capital increase…may provide the board of directors or the general assembly…and the power to limit or exclude the preemptive right” (Article 27§4). As stated in the Explanatory Report of Law 4548/2018 on Article 27, this new regulation is “…in harmony with Article 72 of Directive (EU) 2017/1132” .
Furthermore, regarding the quorum and majority for the relevant decision, the law follows the corresponding percentages required for the decision on the extraordinary increase. Therefore, “…the board of directors decides with a majority of…at least 2/3 of all its members, and the general assembly with a simple quorum and majority”.
(b) Drafting of the Report by the Board of Directors
An important condition and, in time, prior to the decision to limit or exclude the right of pre-emption, is the drafting of a relevant report by the Board of Directors.
The Board of Directors, in particular, is obliged (Article 27§1, section b), to submit a written report to the General Assembly, in which: (a) the reasons for restricting or abolishing the right of pre-emption are stated and (b) the price (or the floor price) proposed for the issue of the new shares is justified. In more detail:
(a) Regarding the reasons that impose the restriction or exclusion of the pre-emption right, general and vague references are not enough: the relevant decision should be adequately and specifically justified. Whereas, (b) regarding the price proposed for the new shares: it should be sufficiently justified as it will, of course, affect the position of the existing shareholders.
The report of the Board of Directors, with the specific content, is intended to inform the shareholders in a timely and valid manner, who will then decide on the limitation or exclusion of the pre-emptive right. Most importantly: this report will form the basis of a possible judicial review, regarding the validity of the restriction or exclusion decision. And this, because the relevant judicial review will require the confirmation or not (and not an a posteriori search) of the serious grounds that justify (or impose) the limitation or exclusion of the pre-emption right and the fulfillment, in general, of the essential conditions for the taking of the relevant decision – as reflected in the relevant report of the Board of Directors.
However, in addition to the aforementioned content of the report, additional references may be required in it. Especially in the event that the Board of Directors (and not the General Assembly) is the body that will decide the relevant restriction or exclusion. In this particular case, it is expressly provided that the report must explain why the right to be revoked is chosen to be done so by decision of the board of directors (Article 27 §4 in fine ) . This, for example, may be required by reasons of urgency – given the flexibility and speed of the Board of Directors to take decisions.
In any case, however, “the relevant report of the board of directors and the decision of the general assembly shall be made public” (article 27 §1, section c).
The Substantive Conditions
As stated above, the law provides a clear record of the formal conditions for the limitation or exclusion of the pre-emption right. However, in addition to fulfilling the formal requirements, the fulfillment of the substantive conditions is also required.
These conditions are mentioned in theory and jurisprudence. Conditions under which it is allowed to limit or exclude the right of pre-emption are “…the corporate interest, necessity and proportionality” ( ind . 265/2011 Multimember Court of First Instance of Athens) , NOMOS Database) .
The exclusion or limitation of the pre-emption right must, first of all, serve the (always superior) corporate interest. Subsequently, it should be the most suitable and necessary means for the promotion of this interest.
The relevant decision should have the fewest possible disadvantages for the existing shareholders. It should also serve the principle of their equal treatment (ie it is not possible to limit or exclude the pre-emption right for some of the shareholders and preserve it for others). It should not, finally, be realized in violation of a right (:281 Civil Code).
Circumstances Not Constituting the Exclusion
However, there are some cases, which do not constitute cases of exclusion of the pre-emption right. In particular, exclusion does not exist when:
(a) the shares are taken over by credit institutions or investment firms, which have the right to receive securities for safekeeping, in order to then offer them to the shareholders (according to Article 26 §1). At the time when the credit institutions or investment companies will offer the above shares to the shareholders, the latter will then be able to exercise the pre-emption right.
(b) the shares are available to the company’s staff, in the context of a free distribution of shares or stock options (Articles 113 & 114).
The Case Of Mixed Increase
As we saw in our previous article, the pre-emption right is basically excluded by law in case of capital increase with contributions in kind (article 26 §1, section a ) We approached this provision of the legislator as reasonable, given that the contributions in kind concern, basically, assets, which are owned by a specific, only, person. The articles of association, nevertheless, can extend the pre-emption right in cases of increase with contributions in kind (article 26 §1, section b).
However, there is also the case of a mixed increase (article 27§3). The increase, i.e., of the share capital that takes place, at the same time, both with monetary contributions and with contributions in kind (with the self-evident obligation to value them – articles 17 and 18).
On a mixed increase, the non-participation of the shareholders who contribute in kind in the cash increase does not constitute an exclusion of the preemptive right. It is assumed, of course, that “…the ratio of the value of contributions in kind, in relation to the total increase, is the same, at least, as the ratio of the participation in the capital of the shareholders who make these contributions” (Article 27 §3, sub .b’).
Protection of the Preemption Right
Preemption is particularly important. Its protection, in the event of its violation, is also particularly important.
In the event, in particular, that the SA issues shares and, in violation of the right of pre-emption (or its exclusion or limitation conditions), makes them available to third parties, then the undertaking of the shares is invalid. However, this is a relative nullity, which the beneficiaries of the right of pre-emption are entitled to assert (Article 175 Civil Code). However, if the decision of the body that took the decision to limit or exclude them is (also) affected, the holder of the relevant right is entitled to claim judicially the annulment of the relevant decision (articles 137 & 138 for the General Assembly and 95 for the BoD Law 4548 /2018).
The right of pre-emption in the increase of share capital proves to be extremely important for the old shareholders as, through it, their rights and legal interests are secured. However, as what (must) prevail is the corporate interest, the restriction or even the abolition of this right is provided for. Sometimes the reasons presented (: corporate interest) are true and valid and sometimes not. Sometimes they move in the direction of defending the corporate interest and sometimes in the direction of defending the interest of the majority shareholders. The (in favor of the corporate interest) documentation of the reasons for limitation or abolition as well as the necessary procedural/formal steps and conditions prove to be particularly important. In case of non-compliance, the shareholder, who consider themselves affected, has the right to appeal to the competent courts for the annulment of the relevant decisions. In order to avoid problems of this nature, which are always serious, not only absolute compliance with the “letter” of the law is required, but also the best possible compliance with its essence.-
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (April 24th, 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.