In a previous article we had the opportunity to understand the importance of equity capital, as well as its differentiation from the property of the SA, which is subject to continuous-successive changes. The share capital, on the contrary, “…constitutes an “unchangeable” mathematical quantity, which is written in the company’s articles of association and which, upon its establishment, corresponds to the sum of the value of the contributions” (: Memorandum to the Law on SAs-4548/2018) . This does not mean, however, that the share capital cannot, under conditions, fluctuate. We will focus now on its growth as well as on specific, interesting (some, perhaps, critical) points of it. In other words: stay tuned!
The dangers
The increase of the share capital (with the exception of the “nominal increase” – for which see immediately below) is one of the main forms of financing of the SA: the “opposite “, so to speak, of financing through (bank) lending. The financing of the company through the increase of its share capital presents a number of advantages over its (bank) borrowing. However, as our subject is not the financing of the SA, we will limit ourselves to the most significant of them.
Specifically: Between the investors/financiers/shareholders and the SA, an equity and not a credit relationship is created. The SA is therefore not obliged – and, in principle, not allowed – to return the capital to its investors/shareholders. But neither does it owe them interest – at least as a rule. The shareholders of the SA, on the other hand, look forward (also as a rule) to receiving, under conditions, dividends and their participation in its profits – if any. Further: increasing the share capital of the SA strengthens the latter’s solvency, as opposed to taking on debt through borrowing.
However, it should not elude us that financing through a capital increase can lead, if the existing shareholders choose/accept/tolerate it, to the entry of new shareholders into the SA. This is especially the case when funding is sought from a crowd of funders/potential shareholders through a regulated market. The increase of the share capital of the SA is therefore possible to bring about changes, sometimes significant, in the (share) balances and the management of the company.
The Distinctions Of Raising Equity Capital
However, the term increase of share capital does not always imply a way of financing it. Let’s see why:
Nominal & Actual Increase
This distinction is a consequence of the distinction between equity capital and corporate property. Particularly:
Nominal Increase
This type of (nominal) increase in the share capital does not constitute an increase in the SA’s corporate assets. It is simply an accounting adjustment of the share capital. An adjustment to be opted by the shareholders, in order to capture the greater value, which the corporate property has acquired due to the existence of (apparent or hidden) reserves.
In this case, the SA may increase the nominal value of its existing shares. Alternatively, however, it is possible to issue new shares and grant them, without consideration, to its existing shareholders – on the basis of their participation in the share capital. In this case, the shareholders do not pay contributions. On the contrary, “…they acquire the new shares automatically… without the need for any declaration of intent. In fact, the acquisition of the new shares by the old shareholders… is mandatory in the sense that no deviating regulation is allowed by decision of the General Assembly. or an arrangement such that this acquisition will depend on the fulfillment of conditions” (ind.: 577/2010 Court of Appeal of Thessaloniki).
It is noteworthy that the decision on a nominal increase is taken by the General Assembly with a simple quorum and majority (Article 130 §3).
Actual Increase
The actual increase constitutes, at the same time, an increase in the share capital of the SA and its corporate property as, through it, new assets flow in.
Further, the actual increase is distinguished into capital increase: (a) by capitalization of profits and (b) by payment of contributions. The conditional capital increase is also actual (: cases of issuing a convertible bond loan -article 71 and granting the option to acquire shares -article 113). The practice of advance payments to shareholders for future capital increases is a variant of the increase by contributions. Further:
(a) Actual increase by capitalization of profits: This is the increase realized by capitalization (of the whole or part) of the net profits, to be distributed, of the SA. The capitalized profits may correspond to the minimum and/or the additional dividend of the shareholders (Article 161 §3).
In this case, the shareholders receive no dividend or, at least, not all of it. The otherwise distributable amount is capitalized. Shares are distributed to the beneficial shareholders, in proportion to the participation of each one in the share capital.
The decision on the specific increase is taken by the General Assembly with a simple quorum and majority.
(b) Actual increase by paying contributions: This is an increase in the share capital by paying contributions in money or in kind.
In this case, new shares are issued to cover the additional (numerical) value of the capital or until it is covered. These shares are taken over (:undertake contract) either by existing and/or (as the case may be) new shareholders. The shareholders are therefore obliged to pay the nominal (and/or, where applicable, the premium) value of the new shares.
The actual increase by paying contributions will concern us below.
Regular & Extraordinary Increase
With the criterion of the body that decides the actual increase by payment of contributions, the latter is further distinguished into regular and extraordinary (article 23 section a’).
Ordinary Increase: It is the increase of the SA’s share capital, which is decided by the General Assembly with an increased quorum and majority.
Extraordinary Increase: It is that increase, which is decided either by the General Assembly with simple quorum and majority or by the Board of Directors. This particular increase, due to its special interest, will concern us in our next article.
The Content of the Decision on the Increase
The minimum content of the decision of the competent, as the case may be, body of the SA to increase its share capital is specified in the law (Article 12 §1, par. d); whether it is a regular or an extraordinary increase. The relevant decision is always published in the Business Registry.
Specifically, in any case of capital increase, the decision of the competent body of the company must state -at least (article 25 §1):
(a) The amount of the increase in share capital. The competent body is, in principle, free to define the amount of the increase. However, in the case of the extraordinary increase, the legislator places specific restrictions on the upper limits of the increase (Article 24 §§1 and 2).
(b) The method of covering the increase (accordingly, i.e. if contributions are to be paid in money or in kind). In the case of contributions in kind, as we have pointed out in a previous article, the relevant decision must meet the conditions of the law (article 17).
(c) The deadline for covering the increase (see related previous article).
(d) The number of shares to be issued.
(e) The type of shares to be issued: whether they are common, preferred or redeemable (nominal, in any case) shares.
(f) The nominal value of the shares. The determination of the nominal value must fall within the limits set by the law: the nominal value of each share cannot be set at an amount lower than €0.04 nor higher than €100 (article 35 §1, section a’).
(g) The sale price of the shares. Setting the sale price is extremely critical. Any low price compared to its true value constitutes underfunding of the SA. In addition, in case of entry of new shareholders, it constitutes a (partial at least) depreciation of the existing shares. On the contrary, any high price makes it difficult to participate in the increase and, by extension, to finance the SA.
In any case, the sale price cannot be less than the nominal value of the share. In particular, it is provided that “…it is prohibited to issue shares below par” (Article 35 §1).
It is possible for the General Assembly, in the case of an ordinary increase only, to authorize the Board of Directors (with the decision of the increase) in order to “…determine the sale price of the new shares, or, in the case of the issue of preferred shares with the right to draw interest, the interest rate and the method of its calculation”. The authorization is submitted to the public and its validity cannot exceed one year (Article 25 §2). This feature gives the Board the opportunity to find the most appropriate time within the year from the increase decision to determine the best possible price. If, however, the Board does not take advantage of the relevant possibility, the increase is aborted.
The Approval of a Class or Classes of Shareholders
The existence of several categories of shareholders (e.g. preferred shareholders) is often found in SAs. It is provided, for these cases, that the decision of the General Assembly for a regular or extraordinary capital increase as well as its decision granting authority to the Board of Directors for an extraordinary increase “…are subject to the approval of the class or classes of shareholders, whose rights are affected from these decisions” (Article 25 §3).
The approval of the decision of the General Assembly, provided by a decision of the shareholders of the affected class, is taken in a special meeting with an increased quorum and majority (Article 25 §3 and 4).
The Control Abuse
The decision on the (regular or extraordinary) increase of the share capital is subject to an abuse control. According to the jurisprudence, the decision of the General Assembly on an increase conflicts with the general prohibition of the abuse of rights based on Article 281 of the Civil Code when the following conditions are met, cumulatively:
“(a) the company does not have any special and specific need to increase its share capital,
(b) the majority shareholders are aware that their respective minority shareholders are in fact unable to participate in the planned increase due to financial incapacity and not simply because of their opposition to the increase; and
(c) the exclusive pursuit and purpose of the majority to achieve through the increase of the share capital is the strengthening of its own position and the corresponding weakening of the position of the minority…” (ind.: 265/2011 Court of First Instance of Athens and 155/1985 Supreme Court, 832/1976 Supreme Court).
In case of abuse of the decision of the body that made it, it is possible to cancel it (articles 137 on the General Assembly and 95 on the Board).
The Possibility of Partial Coverage
The decision to increase the capital modifies, as we have already pointed out, the statute of the SA. The coverage of the increase follows the specific amendment. The coverage, however, may not be complete or may not occur at all. In this case the increase is aborted. However, it is possible to “rescue” the increase when it is not complete – it is sufficient for the relevant decision to provide for this possibility (Article 28).
If partial coverage takes place, the Board of Directors is required to adjust the article of the articles of association on the capital to the amount of the partial coverage. This decision of the Board of Directors does not constitute an amendment to the articles of association.
The law provides that the above decision is carried simultaneously with the certification of the payment of the capital. However, as we have pointed out in a previous article, the certification can also be carried out by another person (chartered accountant or auditing firm). A fact that, in this case, the law overlooks.
The increase of the SA’s share capital, which concerned us above, is, in any case, a factor speaking of the health of the company. Its realization, however, always needs careful planning. Key parameters in this direction: the statutory regulations, the observance of (according to the law) procedural requirements and the relevant “strategic” choices. All of these are able to help either (purely) in the direction of strengthening the company and/or in the direction of strengthening the majority, shrinking the minority or, as the case may be, protecting the latter. The perspective will vary according to the design and interests of the one who has the ability to make decisions but also of the one who feels “affected”.
However, the provisions of the law are important but also, to a significant extent, capable of defending individual interests.
Especially the company’s. –
Stavros Koumentakis
Managing Partner
P.S. A brief version of this article has been published in MAKEDONIA Newspaper (March 20th, 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.