In a previous article we approached the issues related to the increase of the SA’s share capital. There, we were given the opportunity to ascertain the importance of the increase in its funding and, by extension, the achievement of its statutory objectives. However, as obvious as its advantages are, the associated risks are equally obvious; especially with regard to old shareholders (indicative: from the disruption of shareholder balances, unwanted changes in management, and even, in some extreme cases, the violent exit of minority shareholders from SA etc.). The specific (and not only) risks are attempted to be tamed (or even adequately managed) by the legislator through the right of pre-emption.
Concept & Right Holders
The meaning of the right of pre-emption is defined by the law itself: “In every case of capital increase, which is not done by a contribution in kind, as well as in case of issuance of bonds with the right to convert into shares, a right of pre-emption is granted to the entire new capital or the bond loan, in favor of the existing shareholders at the time of issue, according to their participation in the existing capital” (article 26§1 law 4548/18).
This specific right is entitled to be exercised by every shareholder, who has the specific status at the time of the decision to increase the share capital. They are given, through this, the option to be provided with new shares, issued due to the increase (or issuance of convertible bonds), in number proportional to those they already own. In the event that one shareholder has the bare ownership and another the usufruct of the share, the pre-emption right is recognized to the one holding the bare ownership – with the argument that it does not constitute a fruit or benefit of the shareholder’s right (ind.: 577/2010 Official Gazette).
This right arises in any case of increase (regular or extraordinary) of the share capital. However, the case of an increase with contributions in kind is expressly excluded. The provision seems reasonable: contributions in kind are basically aimed at assets, which belong to a specific, only, person. It is provided, however, that the statute can extend the pre-emption right in cases of increase with contributions in kind (article 26 §1, section b).
A more specific content is provided for the pre-emption right, in the event that the SA has issued several classes of shares. Classes of shares, e.g., in which the individual rights to vote or to participate in the profits or in the distribution of the liquidation product are not identical. It is possible in this case, under the condition of a relevant statutory provision, to increase the capital with shares of only one of the categories. The pre-emption right is granted, then -in priority, to the shareholders of the category to which the new shares belong. If it is not exercised in its entirety, the remaining shareholders of the other classes are invited to exercise it proportionally.
Legal Nature & Transferability
As pointed out in the jurisprudence (3403/2006 Court of Appeal of Athens), the pre-emption right is part of the general share rights. In those, i.e., the rights that belong to all shareholders – in proportion to their participation in the corporate capital. It is characterized as a mixed share right as it gathers elements of property and administrative rights. Its exercise includes a declaration of the shareholder’s will to take over the new shares of the SA, in proportion to their shareholding. It constitutes, in essence, a legal restriction of the contractual freedom of the SA.
However, certain issues arise regarding the transferability of this right. The right of pre-emption, until the increase of the share capital is decided by the competent body, “…constitutes an abstract latent right (preliminary) of the definitive right (of the specific definitive right of pre-emption)” (ind. 3403/2006 Court of Appeal of Athens). This abstract right is thus in a “fluid” state. More specifically: it is subject to the suspensory condition of the decision to increase the share capital.
During the stage of the specific suspensory condition, the old shareholders do not have any claim to take up new shares. At the same time, the pre-emption right is inextricably linked to the share and cannot be separated from it. It cannot, therefore, be transferred. However, after the fulfillment of the specific suspensory condition (: decision to increase the share capital), the (conditional) beneficiaries become definitive. The specific, now, pre-emption right constitutes an independent debt right with a property character. It is therefore possible to transfer it independently.
Part of the theory, however, characterizes this jurisprudential position as incorrect. It is argued that the abstract pre-emption right must be distinguished from the pre-emption right that concerns a specific increase, even future or contingent to take place. The latter (: a pre-emption right concerning a future or possible increase) is transferable, even before the relevant decision is taken – as a right of expectation.
Second Degree Pre-emption
An important provision of Law 4548/2018 (which is also highlighted in the Explanatory Memorandum to the law on Article 26), is the provision of the “second degree” pre-emption right to unallocated shares.
It is specified, in particular, that if shares remain unallocated after the (non) exercise of the pre-emptive right, priority may be given “…to the shareholders, who have already exercised the pre-emptive right, as well as to other persons who generally hold convertible securities in shares”-(such, e.g., are convertible and exchangeable bonds and warrants, article 26 §4 in fine).
The specific second degree pre-emption right may be provided for by the articles of association. However, in the event that there is no such statutory provision, its content (and the beneficiaries) are determined by the Board of Directors who will be called upon to further offer the shares that remained unallocated.
Invitation to Exercise the Right
In order to exercise the pre-emption right, the relevant invitation must precede. Also its publication in Business Registry by actions of the SA (Article 26 §3). The deadline for its exercise constitutes its mandatory content. The statute may call for further publicity.
It is, however, possible to omit the relevant invitation and, by extension, the notification of the relevant deadline, in the following two cases: (a) if the General Assembly that decided on the increase was attended by all the shareholders – who represent the entire share capital and became aware of the deadline set for the exercise of the pre-emptive right and/or (b) if all the shareholders declared, in any way, that they will or will not exercise the relevant right. In the two specific cases, any insistence on publicity formalities would simply be formalistic and unjustified.
Excluded from the possibility of omission, however, is the case where, in the context of a regular increase, the Board of Directors is authorized to determine the sale price of the new shares. Also, on the issue of preferred shares with the right to draw interest, the interest rate and the method of its calculation (Article 25 §2). The specific exceptions seem reasonable as, in both cases, shareholders are unaware of essential information for exercising their pre-emptive right.
As an alternative to the publication of the invitation to the Business Registry for the exercise of the pre-emptive right, it is possible to replace it with a registered, “on receipt” letter to the shareholders; and this, without the need for a relevant statutory provision.
The deadline for exercising the right of pre-emption starts from the knowledge of the relevant call by the shareholders, according to the above [or from the time of the relevant decision of the Board of Directors, at the earliest, in the case of its authorization in the context of a regular increase (Article 25 § 2)].
Deadline for the Exercise
The body of the SA (General Assembly or Board) that decides on the increase also determines the deadline within which the pre-emption right can be exercised (Article 26 §2). This deadline, however, cannot be shorter than fourteen (14) days nor exceed the deadline for payment of the increase – i.e. the four (4) months (Article 20 §2).
In the event that the SA body that decides the increase fails to set the deadline for exercising the pre-emption right, it will be set by a decision of the Board of Directors (Article 26 §3). But always within the aforementioned time limits (:14 days to 4 months).
Especially with regard to the determination of the deadline for the exercise of the pre-emption right by the other (other classes of) shareholders, the competent body is also defined as the one that decides on the increase. The relevant deadline cannot be less than ten (10) days. It starts the day after the expiration of the deadline for exercising the pre-emption right for the shareholders of the category to which the new shares belong (article 26 §2 in fine).
Non-Exercise of the Pre-emptive Right
As long as the (above) deadlines for exercising the right of pre-emption have not been exercised, the free offering of the shares follows – subject to the contrary provision of the articles of association (Article 26 §4).
The competent body for the free disposal of shares is the Board of Directors. In fact, it is accepted that it is entitled to dispose of them freely even before the impractical expiry of the deadlines mentioned above. However, the existence of irrevocable declarations of all the shareholders, who did not exercise their right, that they will not exercise it is required.
The law places a restriction on the free disposal of shares by the Board of Directors. In particular, the Board of Directors cannot dispose of the unallocated shares at a price lower than the price paid by the existing shareholders. For the rest, it proceeds with the disposal at its discretion, obviously guided by the company’s interests.
The pre-emption right to increase the SA’s share capital ensures the shareholders, at the time of the relevant decision. It ensures, among other things, that their equity participation will not be reduced, without their choosing (or acceptance), the equity balances will not be disturbed, the management of the SA will not be affected. This specific assurance is critical, but not without exceptions. As for these, the critical i.e. exceptions and their consequences: our article to follow.
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (April 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.