The financing of the SA is a matter that always concerns its management and ownership. And when its self-financing turns out to be unfeasible, its external financing proves necessary. In the context of the latter (apart from the obvious- ie the banking lending) and the issuance of securities. In this context, we have already dealt with the issue of common and preferred shares. More attractive, however, are the redeemable shares– both for the company and its shareholders and for the investors themselves. Let’s try to approach the reason as well as the data around them.
Redeemable shares: Concept
Redeemable shares are those that provide the possibility of their redemption by the issuer SA (: callable shares), from their shareholder (: puttable shares) and/or from both (art. 39 of Law 4548/2018). They are issued as common or preferred with (or without) voting rights.
Redeemable shares: Basic function, purpose and advantages
The redeemable shares are basically a means of financing businesses. The individual terms of their issuance are particularly malleable; they are easily adapted to the needs of the business as well as the wishes of the investor.
The possibility (or, as the case may be, the obligation) of their redemption by the issuing company serves different needs: of its (old) shareholders, of the company and their owners:
In the case of their acquisition by declaration of the company, the company and the old shareholders preserve (and ensure) the pre-existing (and usually family) shareholding structure. Also: the equity balances.
In the case of their acquisition with a declaration of their owners, the disinvestment expectation/agreement is implemented according to the agreed terms and, in particular, the agreed time. The security of the contributor of the capital-holder of redeemable shares is achieved, to a significant extent, since the company itself is its counterparty and liable for performance. In order to further secure their position, further safeguards (eg personal guarantees and collateral from the other shareholders) cannot, of course, be excluded.
Their hybrid character
Their redeemability is what primarily gives redeemable shares their hybrid character. They present, as shares, equity characteristics. At the same time (and because of their redeemability) they present elements of debt – especially when they are deprived of the right to vote. They differ, however, from the cases of taking on debt, as their acquisition presupposes the existence of profits in the SA, a reduction of its capital or the issuance of new shares.
Issuance process
The issuance of the redeemable shares requires a statutory provision (art. 39 §1 paragraph a’). However, they are issued, exclusively, in the context of (regular or extraordinary) increase of the share capital – and not during the establishment of the SA. It is possible to limit or exclude the pre-emptive right of the old shareholders. At the same time, however, if any rights of preferred shareholders are affected, approval of their assembly is required.
It is also possible to convert existing common shares into redeemable shares. A relevant statutory provision is also required as well as a decision of the General Assembly – with an increased quorum and majority (39 §6). The principle of equal treatment of shareholders must be observed when choosing common shares, which will be redeemable. It should be noted, however, that this particular case does not serve the financing of the SA, but the disinvestment of its shareholders, subject to conditions.
Redemption conditions and procedure
The possibility, basic terms, conditions and procedure of redemption of redeemable shares must be clearly defined in the articles of association. As mentioned above, there is great flexibility for their specialization by the competent statutory body that decides on their issuance. The specific body is the one that will decide, therefore, the issue of redeemable (common or preferred) shares with (or without) voting rights (25 §1) as well as the individual terms that concern them – especially with regard to the terms of the redemption.
Redemption conditions
The redemption of the specific shares may be linked to the passage of a specific period of time. However, it is possible to relate their redemption to future and uncertain events (eg: non-admission of the company to a regulated market).
It is also possible to threaten the activation of their buyout as a means of preventing anti-corporate actions and ousting illegal shareholders (eg: breach of fiduciary duty or conduct of competitive acts).
With regard, in particular, to the acquisition price, it is possible that it be fixed or dependent on certain pre-defined parameters (e.g. EBITDA).
For redeemable shares, the redemption conditions set by the law (art.39 §3) include the existence of (initial or introduced with an amendment) statutory provision, the full payment of the shares to be redeemed, the observance of specific redemption rules and the observance of publicity formalities. In case of non-compliance with any of the legal conditions (apart from the compliance with the publicity formalities), it will be null and void.
Regarding, in particular, the statutory provision, it is possible for it to be initial or introduced later on – it can even take place with the decision of the General Assembly, which will decide to increase the share capital by issuing redeemable shares.
Financing
Particularly important conditions for carrying out the acquisition are those concerning its financing. Provided (art. 39 §3 c’) amounts that can be distributed exist (according to art. 159 and 160). The corporate property which is returned to the shareholder of the redeemable shares must be paid from the reserves or profits of the SA.
The acquisition in question, alternatively, can be financed from the proceeds of issue of new shares, which is carried out for this specific (and only) purpose. The share capital, in this case, will remain unchanged: a share capital increase will take place, which will cover the “gap” of the corresponding decrease that will result from the redemption of the redeemable shares.
As a second alternative to the financing of the acquisition is through amounts that are released after a reduction of the capital (according to art. 29 et seq.): the amounts in question will not be returned to the beneficial shareholders but will be used to finance the acquisition.
Creation of a reserve
According to the law (art. 39 §3 d’), it is necessary to create a reserve equal to the nominal value of the shares identified as redeemable. However, this specific condition applies, exclusively, in the event that the acquisition is carried out using distributable amounts. It does not apply, on the contrary, when the acquisition takes place “…using the product of a new issue, which was carried out for the purpose of this acquisition, or amounts released by reducing the capital” (art. 39 §3 par. d’ in fine Law 4548/2018).
Possible premium
The additional amount agreed to be paid to the shareholders, beyond the amount of the redemption price, must be covered by profits that can be distributed (art. 159 and 160). Alternatively, this amount can be paid either by capital reduction (art. 29 et seq.) or from a reserve, which, however, differs from the aforementioned reserve of par. d’ of the same article.
Publicity
The last condition of the law is the publication of the redemption (art. 39 §3 para. f) which, however, has a declaratory nature. Failure to do so does not affect the validity of the redemption.
The declaration for the redemption
The redemption declaration, as already mentioned, can be submitted either by the SA or by the shareholder (art. 39 §1).
In the event that the declaration is made by the shareholder, it brings about its results, under conditions (art. 39 §4). Initially, the conditions stipulated, if any, in the articles of association must be met. However, the SA, in addition, should have available (at the time the SA receives the shareholder’s declaration for redemption) sufficient (to satisfy the declaration) amounts from those that are allowed to be distributed (according to no. 159 and 160). Otherwise, the shareholder’s declaration has no effect (art. 39 §4 in fine).
As long as the declaration for the redemption takes place and the redemption process is completed with the payment of the redemption price, its legal consequences occur. The owner of the redeemable shares loses, in this case, their shareholder status and the redeemed shares return to the SA (art. 39 §5). Completion of the acquisition process, therefore, will not result in a reduction of the SA’s share capital.
The use of the institution (and individual options) of redeemable shares is yet another arrow in the company’s quiver to achieve its financing. Further: The use of the option to convert existing shares into redeemable ones is a means of return to the shareholders (part or all) of their participation in the SA’s share capital.
The optimal utilization of the multiple possibilities of the specific institution depends (and must depend) on the current data, the needs and choices of the company; mainly: of the majority shareholders.
Do with that, therefore, as you may.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (July 10th, 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.