In a previous article we dealt with the concept and distinctions of equity capital. But for its implementation we need planning, preparation and, of course, a “road map”. It is precisely these that will concern us here, together with the techniques and conditions of reduction. The rights and protection of lenders will be the subject of our next article.
Equity Reduction Techniques
The legislator does not detail specific reduction techniques. The theory is called upon to cover the relevant gap; there are three alternatives. Specifically:
Reduction of the Nominal Value of Shares
It is this particular technique that ensures, more than any other, the principle of equal treatment of shareholders. Through this, the nominal value of the shares (either in total or of a certain category) is reduced. The nominal value, however – after the reduction, cannot fall short of the, according to law, minimum of €0.04 (art. 35 §1 law 4548/2018). Any need for further reduction should be met by some other technique (from the remaining two).
Cancellation of Shares
The cancellation of shares naturally results in a reduction of their total number. Its direct consequence is the depreciation of the share rights, which derive from the canceled shares.
The cancellation of shares must, in principle, be done uniformly and proportionally – for all shareholders. Possible unilateral cancellation requires: either a statutory provision (initial or resulting from a unanimous decision of the shareholders) or the consent of those affected. In any case, cancellation of shares takes place in cases of mandatory reduction .
Consolidation of Shares
The technique of combining shares is, essentially, a combination of the immediately preceding methods of reduction. Based on this, certain shares are cancelled. The nominal value of the balances changes, at the same time – and with a specific ratio.
Capital Reduction Conditions & Procedure
Given the importance of share capital, we have already pointed out that its amount, coverage , payment as well as its maintenance at specific levels are governed by specific rules. In order to prevent them from being circumvented, the reduction process requires strict rules and conditions; about them, see immediately below.
Competent body
The decision to reduce the share capital is the responsibility of the General Assembly (art. 117 §1 para. a’ Law 4548/2018), which decides with an increased quorum and majority (art. 29 §1, 130 §3 and 132 §2 Law 4548/2018). It is, however, possible for the statute to provide for greater percentages of quorum and majority – even unanimity (art. 130 §5 and 132 §3 Law 4548/2018).
Unanimity, however, is required – as we have pointed out in our previous article, in the case of uneven reduction. The non-proportional, i.e. non-equal for the shareholders, reduction of the share capital (167/2012 Legal Council of the State).
However, some cases of reduction do not require the above, increased, percentages of the General Assembly for taking the relevant decisions. The decision on the reduction is taken by the ordinary General Assembly (art. 29 §1 and 130 §3 Law 4548/2018), by simple quorum and majority, in cases of mandatory reduction; specifically:
(a) In the case of the cancellation of shares that were not repaid – after the fruitless attempt of the SA to sell them (art. 21 §§5 & 6 and 20 §9 of Law 4548/2018 – see also our previous article).
(b) In the case of the cancellation of the company’s own shares – if it was not possible to sell them (§§6 & 7 of article 49 of Law 4548/2018).
The Invitation to Convene the General Assembly
Content
With the exception of the cases of taking a decision by an unsolicited & universal General Assembly or the signing of minutes without a meeting (art. 135 of Law 4548/2018), an invitation of the General Assembly is required. The specific invitation must define, at a minimum, the purpose of the reduction and the method of its implementation (Article 29 §3 Law 4548/2018). A special mention should be made, in the event that a share capital reduction in kind is to take place.
Purpose
The minimum, by law, content of the invitation serves a dual purpose.
It aims, on the one hand , to inform and not surprise the shareholders, in view of the holding of the General Assembly that will decide on the reduction. The shareholders, receiving the relevant information, can consult and prepare more fully, in order to exercise their right to vote.
It aims, on the other hand, to inform the lenders of the SA (and its potential contractors) in order to proceed (or not) to exercise their legal rights (art. 30 law 4548/2018- for which see our next article).
Legal consequences of violation
The possible failure to mention (or incorrect mention) in the invitation of the elements provided for by the law had the consequence, under the previous law, of the invalidity of the reduction of the share capital.
On the contrary, as the Explanatory Report on article 29 of Law 4548/2018 points out “…the phrase…under penalty of invalidity was deleted”. Today, therefore, any omission or misstatement of information on the invitation (or on the decision) is judged on the basis of “…the general rules on defective decisions of the General Assembly”.
The Content of the Decision of the General Assembly on Reduction
Purpose of Reduction and Method of Implementation
The decision of the General Assembly on the reduction of the share capital, as well as the invitation, must at least mention the purpose of the specific reduction and the method of its implementation (art. 29 §3 Law 4548/2018). The General Assembly may, however, decide otherwise as to the manner of reduction.
Capital Reduction In Kind
As we mentioned in our previous article, a special way of reduction is the reduction of share capital made by payment in kind. In this case, the decision of the General Assembly must accurately describe the assets that will go to each of the shareholders, to avoid any kind of doubt regarding the distribution (art. 31 §1 law 4548/2018).
Amendment of Articles of Association
The reduction of the SA’s share capital requires an amendment of the relevant provision of its articles of association by the General Assembly (29 §4 Law 4548/2018). In particular, the General Assembly must decide on the modification of the amount of the share capital, as it is formed after the reduction. At the same time, and depending on the technique adopted, the modification of the nominal value of the shares and/or the modification of their number. The specific amendment of the articles of association requires the approval of the Management (art. 9 Law 4548/2018).
Minimum Reduction Limit of the Share Capital
The General Assembly cannot, in principle, decide to reduce the SA’s share capital, so that it falls short of the minimum limit of €25,000 (art. 15 §2 Law 4548/2018). However, it can also be decided to make it (even) zero, as long as it is simultaneously decided and, subsequently, implemented to increase the share capital up to, at least, the minimum legal amount.
However, it is possible, as an alternative, to make a decision to simultaneously convert the SA into another corporate type, which by definition will require less or no capital (article 29 §2, section a’ of Law 4548/2018).
Means of “Blocking out” Shareholders(?)
The decision to reduce the share capital to zero can act as a means of removing existing shareholders. Restraint in the relevant event is the right of preference in the upcoming, necessary, increase. Specifically, the law provides that in this increase “…the company’s shareholders have a right of preference according to their participation in the capital, as it was formed before the reduction.” (art. 29 §2, ed. b’ of Law 4548/2018). Despite the doubts regarding the previous regime, the Explanatory Report on article 29 states that: “…it is clarified that in case of a reduction of the capital with a simultaneous decision to increase it, the pre-emptive right of the old shareholders is not removed, even in the case that after the reduction the participation in the capital may have been zeroed out”. There is always, of course, the possibility, under certain conditions, of excluding the right of pre-emption, in this specific increase as well…
Approval of More Classes of Shareholders
Various categories of shareholders may participate in the SA’s share capital (e.g. preferred shareholders, holders of redeemable shares). The decision of the General Assembly to reduce the share capital may affect, directly or indirectly, the rights of one or more categories. In this case, the approval of the affected shareholders is foreseen as a condition for the progress of the relevant procedure. This approval is provided by a decision of the shareholders of the affected category, taken in a special meeting with an increased quorum and majority (art. 29 §6 Law 4548/2018).
The General Assembly of the particular category (or possibly more categories) of shareholders only decides whether or not to grant the required approval. It does not decide on the individual conditions of the reduction, which have already been determined by the shareholders of the SA. Regarding the procedure for convening the special General Assembly, the relevant provisions for the General Assembly of Shareholders are applied accordingly (art. 29 §6 Law 4548/2018).
Publicity of the Reduction Decision
The decision to reduce the share capital is, as we pointed out, of particular importance both for the SA and its shareholders, but also for the SA’s lenders and business partners. Necessary, therefore, is its publicity. It takes place, given its nature as an amendment to the statute, on the website of the Business Registry, after approval by the Administration (art. 12 of Law 4548/2018). Furthermore, the law requires that the relevant decision “…be also posted on the company’s website” (art. 29 §4 in fine n. 4548/2018).
Matters connected with the reduction of share capital seem, indeed, “dry” technically and, of course, tedious. They prove, however, to be particularly important to the company, its lenders, and its shareholders—so much so that they may lead to a “blocking out” of the company of some of them. Solutions exist to protect those involved. But especially with regard to the company’s lenders, see our next article.-
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (May 15th, 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.