SECOND DIRECTIVE. др Вук Радовић, LL.M.

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1 др Вук Радовић, LL.M.

2 I. General questions 1) Importance Second Directive as a core part of European company law usually called Capital Directive comparison with first company law directive criticized and praised

3 I. General questions 2) History proposal 1970, adopted in 1976 amended in 1992 and 2006 codified version 2012 influenced by UK general approach is continental (German)

4 I. General questions 3) Personal scope of application applies to public liability companies exceptions open investment companies cooperatives incorporated as public company proposed extension of scope opposite trend (deregulation of PLC)

5 I. General questions 4) Nature dispute: provisions are only minimum standards more stringent national rules are prohibited (rules are exhaustive) provision by provision analysis

6 I. General questions 5) Purpose creditor protection shareholder protection

7 I. General questions 6) Subject matter a) Equal treatment of shareholders b) Disclosure of information c) Formation of the company d) Maintenance of the capital e) Alteration of the capital

8 I. General questions 7) Deregulation trends 1. Contribution in kind 2. Non par value shares 3. Acquisition of own shares 4. Financial assistance 5. Pre-emptive rights 6. Capital reduction 7. Squeeze-out right

9 II. Equal treatment of shareholders formulated as a general principle only to the extent that SHs are in the same position equal treatment and other directives

10 III. Formation (protection of capital) 1. Responsibility for liabilities before authorization to commence business company is forbidden to commence business before authorization by or on behalf of the company unless it was conditional There should be a debtor

11 III. Formation (protection of capital) 2. Number of members bellow national requirement no automatic dissolution 3. Minimum capital at least Euro flexible standard condition for incorporation or obtaining authorization deterrent effect and signal of seriousness

12 III. Formation (protection of capital) 4. Value of shares nominal value or accountable par true no par value shares issued price prohibition to issue bellow par credit institutions exception

13 III. Formation (protection of capital) 5. Contributions in general nature of consideration for shares capable of economic assessment performing work and supplying services as a contribution is forbidden time of performance contributions in cash at least 25% possibility to derogate not applicable to premiums contributions in kind within 5 years

14 III. Formation (protection of capital) 5. Contributions in general releasing shareholder from the obligation to pay up contribution formation and capital increases reduction of capital exception

15 III. Formation (protection of capital) 6. Consideration in kind independent valuation as a general principle purpose creditor protection SHs protection independent experts report content publication

16 III. Formation (protection of capital) 6. Consideration in kind exceptions from expert opinion necessity when there is a clear point of reference for the valuation of consideration in kind three situations: 1) where there is a market price 2) where there is a recent valuation 3) where values derive from audited accounts

17 III. Formation (protection of capital) 6. Consideration in kind protection against circumvention company acquires an asset time limit from founders, SHs or any other persons acquisition value Expert valuation + Approval of the GMS

18 III. Formation (protection of capital) 6. Consideration in kind protection against circumvention exemptions: 1. current business transaction 2. transaction was ordered or controlled by an administrative authority or by a court 3. stock exchange acquisition Do Member States have the power to adopt stricter measures?

19 IV. Maintenance of the capital 1. Distributions to shareholders 1) after the end of the financial year dividends and interest (meaning of distribution) balance sheet test profit and loss account test 2) during the year interim dividends (meaning of distribution) interim accounts (additional condition)

20 IV. Maintenance of the capital 1. Distributions to shareholders specific situations hidden dividends law of groups claim for return distribution made contrary to Art. 17 company has a right to claim for return de minimis rule

21 IV. Maintenance of the capital 2. Duty in case of a serious loss of capital serious loss of subscribed capital obligation to call general meeting of SHs freedom of Member States to regulate: amount of loss time for the calling of GMS agenda sanctions

22 IV. Maintenance of the capital 3. Acquisition of own shares Two ways of acquisition: subscription of own shares forbidden purchase of own shares possible subject to limitations

23 IV. Maintenance of the capital 3. Acquisition of own shares Obligatory limitations to purchase own shares: 1) authorization by GMS derogation if it is necessary: a) to prevent serious and imminent harm to the company b) for employee participation 2) minimum content of decision 3) may not reduce the net assets below certain amount 4) fully paid-up shares

24 IV. Maintenance of the capital 3. Acquisition of own shares Optional limitations to purchase own shares: 1) maximum percentage 2) limitations in internal documents 3) reporting and notification requirements 4) shares must be cancelled and the value must be included in specialized reserves 5) shall not prejudice creditors claims

25 IV. Maintenance of the capital 3. Acquisition of own shares Possible exemptions: 1) shares acquired on a reduction of capital 2) universal transfer of assets 3) pursuant to a court order to protect minority shareholders 4) donation 5) as a underwriting commission 6) execution of the debt 7) investment funds

26 IV. Maintenance of the capital 3. Acquisition of own shares Ex post limitations: suspension of voting rights balance sheet positions minimum information in the annual report obligation to dispose shares acquired in contravention shares acquired pursuant to exemptions

27 IV. Maintenance of the capital 3. Acquisition of own shares Extension of rules: acceptance of own shares as security applicable to the group as a whole in case of groups

28 IV. Maintenance of the capital 4. Financial assistance typical cases of financial assistance ratio legis arguments in favor of fin. assist. abolition original prohibition in Second Directive liberalization of financial assistance Financial assistance is conditionally allowed

29 IV. Maintenance of the capital 4. Financial assistance six conditions: 1) fair market conditions 2) due investigation of credit rating of the counterpart 3) GMS prior approval 4) written report to the GMS 5) in accordance with limitation of distributions 6) acquisition or subscription must be at a fair price

30 IV. Maintenance of the capital 4. Financial assistance exemptions: 1) financial assistance with a view to the acquisition of shares by company s employees 2) transactions made in normal course of business of financial institutions 3) other exemptions

31 V. Alteration of the capital CAPITAL INCREASE CAPITAL REDUCTION + PRE-EMPTIVE RIGHTS

32 1. Capital increase 1) Applicability shares convertible securities securities which carry the right to subscribe for shares 2) GMS competence cannot be restricted by law or through the company statutes voting by classes decision plus increase must be published no rules on majority

33 1. Capital increase 3) Authorized capital exception from GMS competence maximum amount maximum time limit 5 years

34 1. Capital increase 4) Capital increase procedure duty to contribute contributions in kind differences between these procedures: the premium has to be paid in full right away exception for contributions in kind partial subscription similar to Art. 9 and 10

35 2. Pre-emption right 1) Meaning and purpose 2) Who has a pre-emption right? shareholders exception (optional for States): class by class approach

36 2. Pre-emption right 3) Type of capital increase only in the case of capital increase for cash 4) Scope of application applies to the following securities: shares securities convertible into shares securities which carry the right to subscribe for shares exception (optional for States): shares with reduced pecuniary rights

37 2. Pre-emption right 5) Procedural requirements notification publication or individual notification time for exercising rights two weeks

38 2. Pre-emption right 6) Restriction or withdrawal may not be restricted by internal acts of the company decision of the GMS qualified majority vote written report by the board reasons justification of the proposed price substantive requirements left to the national law

39 2. Pre-emption right 6) Restriction or withdrawal decision of the board only in the framework of authorized capital report of the board is necessary conditions 7) Possibility to derogate

40 3. Capital reduction 1) GMS competence obligatory content of the notice convening the meeting qualified majority vote voting by classes decision must be published

41 3. Capital reduction 2) Protection of creditors two conditions for protection: a) claim antedates the publication of the decision b) claim has not fallen due unless right to obtain security creditor has adequate safeguards safeguards are not necessary

42 3. Capital reduction 2) Protection of creditors conditions for the exercise of the right right of a creditor to initiate the administrative or judicial proceedings a) if they can demonstrate that the reduction would jeopardize their claim b) no adequate safeguards have been obtained from the company consequences if each creditor does not obtain security

43 3. Capital reduction 2) Protection of creditors exceptions a) offset losses b) include sums of money in a reserve 3) Minimum capital requirement

44 VI. Possible future developments 1. Minimum capital 2. Non par value shares 3. Contributions in work and services 4. Pre-emptive rights 5. Squeeze-out and sell-out right VII. Alternative regime for shareholders and creditors protection