The increase of an SA’s share capital has already been the focus of a previous article. We had the opportunity, there, to point out the importance of the capital increase as a way/means of financing the SA; to also refer to the distinctions of the increase and, among others, to their regular or extraordinary nature. The regular capital increase is the one decided by the General Assembly with an increased quorum and majority. The extraordinary increase is the one decided either by the General Assembly (with a simple quorum and majority) or by the Board of Directors. Regarding the extraordinary increase, see right bellow:
The changes brought about by Law 4548/2018
The possibility of an extraordinary share capital increase was also provided for under the previous regime (Article 13 of Legislative Decree 2190/1920). As, however, it is pointed out in the Explanatory Report of Law 4548/2018 (on Article 24), the regulations previously in place were reformed. The three most important changes were the following:
(a) The first differentiation concerns the quantitative limits for the increase of the share capital, by the Board of Directors and the General Assembly, which is set by the law: The relevant quantitative limits are increased.
(b) The second differentiation concerns the abolition of the prohibition of an extraordinary increase, as long as there are significant amounts of reserves. [As pointed out in the Explanatory Report of Law 4548/2018, such a prohibition is not considered necessary for the protection of the share capital. In addition, a relevant prohibition is not even provided for by the Corporate Directive 2017/1132/EU (-with the regulations of which the law on SAs complies)].
After all, the business opportunities that the SA can benefit from, through the flexibility provided by the extraordinary increase, are clearly essential even for strong SAs with potentially significant reserves.
(c) The third differentiation concerns the unorthodox, older regulation that the extraordinary increase does not constitute an amendment to the articles of association. It is now expressly provided that the extraordinary increase of the share capital, regardless of the body that decides on it, constitutes an amendment to the articles of association. It is further clarified that it is not subject to administrative approval (Article 24 §4). The specific provision of the law clarifies the legal nature of the extraordinary increase. Since it is provided (and rightly so) that it constitutes an amendment to the statute, the body that decides should amend the relevant articles of the latter and draw up its new, codified, text. Afterwards, it will have to satisfy the necessary publicity formalities in the Business Registry, which are of a constitutive nature. These are obligations that the body that made the decision (General Assembly or Board of Directors) did not carry under the previous regime: the registration in the Business Registry was accepted to be of a declarative character.
As for the rest, in terms of its legal nature, the extraordinary increase is the same as the ordinary.
Extraordinary Increase By Decision of the Board of Directors
In principle, the corporate body responsible for increasing the share capital is the General Assembly (Article 117 §1 para. a’ and §2 para. a). However, the General Assembly, compared to the Board of Directors, is characterized by less flexibility and speed, in terms of convening and taking a decision – especially in those cases where there is a wide or even significant dispersion in the share capital of the SA. In order to speed up the relevant procedures and deadlines, the Board of Directors is granted, under conditions, the power to increase the company’s capital. Thus, the BoD, as a more flexible (compared to the General Assembly) corporate body, can more quickly decide (as well as implement) an increase in the SA’s share capital. And this, taking advantage of favorable circumstances, covering pressing, time-consuming needs and/or choosing the optimal sale price of the shares.
However, the possibility of an extraordinary increase in the share capital by the Board of Directors requires the fulfillment of specific conditions; depending on the provision of the relevant authority by the statute or the General Assembly of the company. Specifically:
Authority Given By The Statute
If the relevant possibility is provided by the articles of association, the Board of Directors has the right by its decision to increase the capital, partially or fully, by issuing new shares (Article 24 §1). This possibility is subject to time and quantitative limitations.
Time limit: The duration of the (statutory) authorization to the Board cannot exceed five years from the establishment of the company. The relevant provision may exist in the SA’s initial (at the time of its establishment) statute or, alternatively, in a subsequent amendment thereof.
Quantitative limit: The share capital increase decided by the Board of Directors cannot exceed three times the initial capital of the SA.
Therefore, within the specific time and quantitative limitations, the Board of Directors can, legally, decide on one or more consecutive increases of the share capital, together with their relevant more specific conditions (e.g. sale price of the new shares). The relevant decision of the Board of Directors is taken by a majority of 2/3, at least, of all its members.
Authority Given By The General Assembly
The authority of the Board of Directors to increase the share capital can be provided, in addition to the articles of association, by the General Assembly of the SA (Article 24 §1, para. b). In this case the General Assembly decides with an increased quorum and majority (Article 130 §3). The relevant decision is submitted to the Business Registry.
The time and quantitative limitations, referred to above, apply, with some variations, also in the case of the granting of authorization by the General Assembly.
Time limit: In the case of the authorization of the Board of Directors by the General Assembly, its authority to decide the capital increase cannot exceed five years as well. The five-year period in question, however, starts from the granting of the authorization to the Board by the relevant decision of the General Assembly (and not from the establishment of the SA). Noteworthy, however, is the law’s provision that “…this authority of the board of directors can be renewed by decision of the General Assembly for a period of time that cannot exceed five years for each granted renewal.” (article 24 §1, para, c΄). The five-year time limit starts, in this case, from the time point of each renewal.
Quantitative limit: The quantitative limitation remains similar to the case of the authority granted from the statute. With an important difference, however: the amount of the increase that the Board of Directors is entitled to decide cannot exceed three times the paid-in capital, which exists on the date the relevant authority was granted.
Extraordinary Increase By Decision of the General Assembly
The decision regarding a regular increase of the share capital is taken, as we have already pointed out, by the General Assembly, which decides with an increased quorum and majority.
However, the General Assembly is able, also under conditions, to decide an extraordinary increase of the SA’s share capital. This possibility also aims, in this case, to facilitate the relevant procedure (Article 24 §2). A special difference of the extraordinary, in relation to the regular, increase is the fact that the General Assembly decides the increase with a simple quorum and majority (against regular increases).
Also in the case of the extraordinary increase of the share capital by the General Assembly, the fulfillment of specific conditions is obligatory. First of them: the relevant statutory provision. There are, however, further time and quantitative limitations.
Time limit: In the case of the extraordinary increase of the share capital by decision of the ordinary General Meeting, the time period for exercising the power to increase cannot exceed five years from the formation of the SA as well. However, no provision is made for the possibility of renewing the authority of the General Assembly.
Quantitative limit: The increase of the share capital cannot exceed eight times the initial capital.
Parallel competence of the General Assembly & Board of Directors; Prohibition of Disclosure of the Possibility of Extraordinary Increase
The legislator adopts two more options regarding the extraordinary increase of the share capital.
The first concerns the recognition of the parallel possibility of an extraordinary increase by both the Board and the General Assembly (Article 24 §5). In this (unusual-indeed) case, however, it is necessary to meet the, as the case may be, already mentioned conditions. Also: the individual time and quantitative limitations are examined separately for each case of increase.
The second concerns the protection of third contracting parties (Article 24 §3) from the possible abuse of such an extraordinary increase. Specifically: it would not be unprecedented (quite the contrary) to mislead third parties or to have their expectations disappointed by the promotion of the power of the individual bodies of the SA to decide on an extraordinary increase of the share capital; a power that would possibly never be exercised by the corporate bodies, as the case may be.
In order to avoid any negative consequences of the extraordinary increase, the legislator provides that it is prohibited for SAs, whose articles of association provide for the possibility of an extraordinary increase “…to state in any form, advertisement, publication or other document, as capital, the amount up to which the board of directors or the General Assembly is entitled… to issue new shares.” (article 24 §3).
Extraordinary Vs Ordinary Share Capital Increase
We have already seen that the General Assembly can decide on an extraordinary increase of the company’s share capital with a common (and not increased) quorum and majority. We have also seen that the Board of Directors can decide, very quickly, on an extraordinary increase with a majority of 2/3 of its members; in fact, without the need to convene a General Assembly.
But what do the specific powers mean in prectice?
The General Assembly, with reduced percentages, is entitled to increase the company’s share capital up to eight times the initial amount. In other words: a shareholder who directly or indirectly owns ½ of the share capital + one share has the right to decide to increase it – up to eight times the initial amount. What if they have the necessary funds while the other (co)shareholders do not? They have the power to significantly expand their own shareholding and dramatically reduce the shareholding of other shareholders – even below critical percentages.
Under the condition of reaching the quorum of the General Assembly (1/2 or 1/5 of the total), a shareholder holding 13.34% of all shares is entitled, subject to conditions, to take a decision on an extraordinary increase up to eight times the initial of capital. In this case, as long as they have the necessary funds, a small minority shareholder can become a majority shareholder.
On the other hand, the implementation of an extraordinary increase in the share capital by the Board of Directors may result in the rapid achievement of a specific business goal. As the convening of a General Assembly is not required, the relevant process can be accelerated at least during its convening deadlines – in the cases where we are not talking about a General Assembly where all shareholders are present. Such a fast process can prove to be valuable in cases where very quick actions are required – e.g. capitalizing on a significant business opportunity.
Accordingly, however, a shareholder who (regardless of the number of shares the shareholder holds) has (or can convince or join) 3/5 of the members of the Board of Directors, can decide an extraordinary increase up to three times the share capital. And if, at the same time, they have the necessary funds to cover the increase, but the other shareholders do not, they can easily become, once and for all, a major shareholder or even a majority shareholder.
Taking advantage of the (potential) opportunity for an extraordinary increase in share capital can prove to be a valuable tool for quickly achieving a specific business goal; for taking advantage of an important business opportunity. It is possible, however, at the same time, for it to prove to be a useful tool (or, as the case may be, dangerous – depending on the perspective) for the restructuring of shareholdings, the change of critical majorities and even the surrender of the reins of the company and its management itself.
The introduction, therefore, of the specific discretion, the composition of the share capital and the Board of Directors itself require special attention and vigilance: they can prove to be decisive in the direction of the achievement of legitimate or illegitimate goals.
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (April 2nd, 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.