Archontoula Tsogia, LL.M
Summary: One of the main ways of financing a company is to increase its capital. Indeed, the inflow of new assets into the company greatly facilitates its transactions with third parties, since the improvement of its financial and accounting image implies the confidence of existing and potential creditors in its solvency. A problem arises when the capital increase is used by the majority solely as a means of altering the company's shareholder structure in order to weaken the minority.
An increase in share capital is the main way for a company to obtain new capital (financing) in order to cover its operational needs, expand its activity and implement investment projects, cover losses from previous years, etc. It is a fact that the size of a company's capital is an indicator of its soundness, facilitates its transactions with third parties and, therefore, among other things, its financing from external sources, as it indicates its solvency.
In view of its importance for the company, the legislator has laid down a number of strict provisions to regulate the procedure for taking a decision to increase capital, to ensure that such a decision is lawful and not abusive, and to ensure that it is made public. These include, among others, the requirement of the existence of an increased quorum and majority in the adoption of the contested decision of the General Meeting for an ordinary capital increase (articles 130(3) and 132(2) of Law 4548/2018), the fact that the increase is considered an amendment to the company's Articles of Association and the relevant decision must be published in the G. E.M.I. (Article 117 (1) (a), 23 and 12 (d) of Law 4548/2018), as well as the obligation of the company to provide all its shareholders with the right of pre-emption for their participation in the new capital by acquiring new shares (Article 26 of Law 4548/2018).
2. Increase of share capital by abuse of majority power - Requirements.
In case that the decision to increase the share capital of a Joint-Stock company is taken by abuse of majority power, under the conditions of Art. 281 CC, in apparent excess of the extreme limits of merit that are deleted by good faith, morality and the social and economic purpose of the relevant majority right, then the relevant decision will be null and void, pursuant to Art. 137 para. 2(b) of Law No. 4548/2018 (see also the previous article 35a paragraph 1 of article 35a paragraph 1 of c.c. 2190/1920).
According to this legislative provision, the decision of the General Meeting is voidable if the legitimate interests of the shareholders are affected, without there being an essential reason, or if, although there is an essential reason for their infringement, the principle of proportionality is violated. In other words, there are cases where the sole objective of the majority is to strengthen its position at the expense of the minority, without at the same time there is no benefit for the company itself, i.e. without the decision in question also serving the corporate interest (indicatively, PPRath 23/2018). The court decides on the decision on the abuse of rights, depending on the facts that are brought to its attention each time.
In particular, the conditions for the decision of the General Meeting to increase the capital of the SA to be considered as having been taken in abuse of the majority power, which must be cumulatively met, are the following:
α) There is no specific and special need for the company to carry out such an increase in its share capital.
(b) The majority shareholder(s) must be aware that the minority shareholder(s), due to their existing financial weakness, are not in a position to participate in the forthcoming capital increase. This condition does not apply if the minority shareholder does not wish to participate in the increase due to a simple disagreement with the company's financial - business option in question.
c) The purpose of the capital increase is exclusively to change the company's shareholder composition and to weaken the minority, which, as is known, cannot participate in the increase for financial reasons. In other words, the sole aim of the majority is to use the capital increase in question to strengthen its own position and to weaken the position of the minority, taking advantage of the latter's inability to exercise its pre-emptive rights and to take up the new shares in proportion to its shareholding in the share capital. There is no abuse if the corporate interest is served but, at the same time, the minority may be harmed and the majority may benefit.
It should be noted that the same conditions of abuse as mentioned above also apply if the increase in share capital is decided by the company's Board of Directors.
3. Case law - Indicative case law
Α. Cases where it was held that the decision of the General Meeting to increase the capital was taken in violation of the majority power.
- Decision of the Board of Directors and the General Meeting to increase the share capital of a company by 27,000,000.00 drachmas by issuing 27,000 new shares with a nominal value of 1,000.00 drachmas each, which was far below the actual (market) value, which at the time of the increase amounted to 8,265.00 drachmas. The court overturned the appeal decision, which had dismissed the action brought, considering that the decision to increase the share capital was taken solely for the personal interest of the majority shareholder at the expense of the minority, without there being a justifiable reason for the increase in the interest of the company (Supreme Court 982/1980).
- In the present case, it is a decision of the Board of Directors to increase the share capital of a company limited by shares, which is deemed to have been improperly taken in the same terms as it is deemed to be improper under Art. The Board of Directors, in which the majority of the company participated, took successive decisions within a very short period of time to increase the company's capital by issuing shares at a nominal price of EUR 100 each, whereas the market value of those shares was much higher. The court held that the Board of Directors improperly proceeded with these capital increases, enabling the majority to acquire shares whose actual value (market value) was much higher than the one set, in order to limit the minority's share, given that it was known that the latter could not participate in these increases ( Athens Court of First Instance 5345/2003).
In addition, it is appropriate to cite a decision which held that the decision of the General Meeting to actually reduce the share capital of the company by EUR 78,827.00, with the simultaneous cancellation of shares of comparable shareholders who wished to do so for financial reasons and due to retirement, was taken in abuse of the majority's power. The court held that the General Meeting decision in question did not result in any benefit for the company itself, but only individually for the shareholders whose shares were cancelled in breach of the principle of equal treatment. Furthermore, it did not accept the majority's claim that the shareholders who remained in the company benefited from that increase in their shareholding, since the future profitability of the company is not guaranteed, so that they could hope for increased dividends, and the value of their shareholding was reduced, given the 25% reduction in the company's assets (Thessaloniki Multi-Member Court of First Instance 1239/2020).
Β. Cases, where it was held that the decision of the General Meeting to increase the capital was not taken in violation of the majority power.
- General Assembly decision to reduce the share capital of the company by the amount of 229.500,00 euros (which corresponded to the total of the transferred losses of the company) and simultaneously increase the share capital by the amount of 700.000,00 euros by issuing new shares, so that the company does not risk the revocation of its license or the imposition of fines due to the reduction of its equity below the percentage of 1/10 of the share capital. The court held that the contested decision of the General Meeting was not proven to have been taken in abuse of the majority's power and with the sole purpose of the latter being to damage the rights of the minority shareholder, since it was necessary in order to prevent the company from being dissolved by revoking its licence pursuant to Article 48 of Law No. 2190/20 (Athens Court of First Instance 5885/2010).
- The resolution of the General Meeting of shareholders of the company to increase its share capital did not indicate the purpose which the increase was to serve. It was held that this does not imply the invalidity of the relevant resolution, since it is not sufficient to confer on it the character of illegal or abusive. The Court of First Instance concludes that, while it may thus be possible prima facie to argue that the interests of the minority may have been harmed by the corresponding reduction in its percentage holding in the share capital, it must nevertheless be noted, first, that the harm in the abovementioned sense is not absolute, because the actual value of each share has increased in proportion to the improvement in the company's net financial position as a result of the increase in its share capital and, secondly, it has been established that the weakening of the minority's position was not the main and exclusive purpose of the decision to increase the share capital, while there was also an advantage to the defendant as a result of that increase (Athens Court of Appeal 7120/2004).
- Resolution of the general meeting of shareholders of a company to increase its share capital by cancelling the shareholders' pre-emptive rights and offering the new shares for acquisition to a strategic investor (French bank). The court dismissed the action because there was no reference in the introductory statement to the way in which the abolition of the pre-emptive rights of the existing shareholders would harm the interests of the company and, in particular, to the reason why finding a French bank as a strategic investor would harm the interests of the company. Furthermore, no mention was made of the specific damage suffered by the applicant as a result of the exclusion of the pre-emptive right to the increase in share capital (Athens Court of First Instance 265/2011).
4. The action for annulment
The decision of the General Meeting, as described above, is annulled by the issuance of a final and conclusive court decision, following the filing of an action before the Single-Member Court of First Instance of the company's registered office, within a four-month limitation period from its registration in the G.E.M.H., as it is legally subject to publicity (Articles 23 and 12(d) of Law 4548/2018). The action is brought either by a shareholder or shareholders who collect at least 2/100 of the paid-up share capital or by a member of the Board of Directors (article 137 (3) of Law 4548/2018). 137 par. 4 ν. 4548/2018.
Furthermore, the plaintiff shareholder must either have been absent from the General Meeting at which the contested resolution was adopted or must have attended but opposed the adoption of the resolution. On the contrary, his attendance at the General Meeting and his failure to oppose the adoption of the contested decision should be considered as an implicit resignation. According to the prevailing view, the shareholder's non-attendance at the general meeting does not necessarily have to be causally linked to the ground for annulment. As for the requirement of the shareholder's opposition to the contested decision, it is noted that it must be expressed explicitly and clearly and must relate to the contested decision ( Rhodes Magistrates' Court of First Instance 130/2015), but it is not required to be accompanied by a certain justification. The silence of the shareholder is interpreted as acceptance of the resolution and any simple negative vote is not considered as an opposition. A vote in favour of the resolution, following an express prior opposition to it, is understood as a revocation or waiver of the declaration of opposition and excludes the right to challenge the contested resolution by the shareholder in question.
5. Instead of an epilogue
In summary, given the importance of a decision to increase the share capital of a public limited company for its financing and its solvency image vis-à-vis third parties, as well as its effects on the maintenance or alteration of the percentage of the company's existing shareholders' capital held prior to the increase, with the possible participation of new shareholders in the new capital of the company, it is necessary, inter alia, to ensure that the procedure and the reasons for the decision are legally guaranteed. If that decision is taken for the sole purpose of altering the company's shareholder structure, thereby weakening the minority shareholding, without at the same time serving the company's interests, there is a risk that the decision in question will be annulled by the competent court as having been taken in abuse of the power of the majority.