Corporate Business Forms in Europe: A Compendium of Public And Private Limited Companies in Europe

Corporate Business Forms in Europe Corporate Business Forms in Europe A Compendium of Public and Private Limited Comp...

Author: Frank Dornseifer

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Corporate Business Forms in Europe

Corporate Business Forms in Europe A Compendium of Public and Private Limited Companies in Europe

Frank Dornseifer (Ed.)

Stæmpfli Publishers Ltd. Berne

Sellier. European Law Publishers

ISBN 3-7272-2719-2 (Edition by Staempfli Publishers, Berne) ISBN-10 3-935808-31-3 (Edition by Sellier. European Law Publishers, Mnchen) ISBN-13 978-3-935808-31-6 (Edition by Sellier. European Law Publishers, Mnchen)

Die Deutsche Bibliothek verzeichnet diese Publikation in der Deutschen Nationalbibliografie; detaillierte bibliografische Daten sind im Internet ber http:/ /dnb.ddb.de abrufbar. 2005 by Sellier. European Law Publishers GmbH, Mnchen. Dieses Werk einschließlich aller seiner Teile ist urheberrechtlich geschtzt. Jede Verwertung außerhalb der engen Grenzen des Urheberrechtsgesetzes ist ohne Zustimmung des Verlages unzulssig und strafbar. Das gilt insbesondere fr Vervielfltigungen, bersetzungen, Mikroverfilmungen und die Einspeicherung und Verarbeitung in elektronischen Systemen. Gestaltung: Sandra Sellier, Mnchen. Herstellung: Karina Hack, Mnchen. Satz: fidus PublikationsService GmbH, Augsburg. Druck und Bindung: Ksel GmbH, Kempten. Gedruckt auf surefreiem, alterungsbestndigem Papier. Printed in Germany

List of Authors Czech Republic Martin Holler, Rechtsanwalt Giese & Partner, v. o. s. Praha, Czech Republic [email protected] www.giese.cz

Greece Vasiliki Vavitsa-Hohenau, Attorney-at-Law Independent Legal Consultant Kozani, Greece; Graz, Austria [email protected]

England Jeff McGeachie, Solicitor Fladgate Fielder Solicitors London, England [email protected] www.fladgate.com

Ireland Paula Phelan, Chartered Secretary Director of Company Secretarial Department Mason Hayes & Curran Solicitors Dublin, Ireland [email protected] www.mhc.ie

Estonia Peeter Lepik, Attorney-at-Law Ermo Kosk, Lawyer Law Office of Lepik & Luhar LAWIN Tallinn, Estonia [email protected] [email protected] www.lawin.ee

France Cecilia Della Berta, Avocat la Cour Gide Loyrette Nouel MNP Paris, France [email protected] www.gide.com

Germany Frank Dornseifer, Rechtsanwalt Dornseifer Legal Consulting Dsseldorf/Bonn, Germany [email protected] www.corporate-law-forum.net

Italy Dr. Mara Bolzoni, Attorney-at-Law Studio Legale Sutti Milano, Italy [email protected] www.sutti.com

Lithuania Rolandas Valiu¯nas, Attorney-at-Law Dovile˙ Burgiene˙, Attorney-at-Law Lideika, Petrauskas, Valiunas ir partneriai LAWIN

Vilnius, Lithuania [email protected] [email protected] www.lawin.lt

List of Authors

Netherlands Duco Ottevangers, civil law notary-candidate Dijkstra Voermans Advocatuur & Notariaat Utrecht, Netherlands [email protected] www.dijkstravoermans.nl

Norway Jo Rodin, Attorney-at-Law Thommessen Krefting Greve Lund AS Advokatfirma Oslo, Norway [email protected] www.thommessen.no

Poland Michał Lachert, adwokat Jacek Bondarewski, adwokat Joanna Łysak Agnieszka Szydlik Wardyn´ski & Partners Warsaw, Poland [email protected] www.wardynski.com.pl

Slovakia ˇ auder, Mgr. Slavomr C Attorney-at-Law Giese & Partner, v. o. s. Praha, Czech Republic [email protected] www.giese.cz

Spain Israel Garca Rico, Attorney-at-Law Garrigues Abogados y Asesores Tributarios Madrid, Spain [email protected] www.garrigues.com

Switzerland Dr. Adrian Drig, LL. M., Attorney-at-Law Vischer Anwlte und Notare Zurich, Switzerland [email protected] www.vischer.com

Foreword Charlie McCreevy* No modern market economy can function without efficiently and transparently run companies. Company law therefore has a key role to play in fostering businesses competitiveness and growth and businesses need appropriate and efficient regulation, not over-regulation. The primary objective of EU company law is, in my view, to provide a legal framework enabling businesses to be run efficiently without undue constraints. Company law is deeply rooted in the national laws of the Member States. The wide diversity of national company laws reflects the diversity of corporate cultures in Europe. The objective of European company law is not, and never has been, to replace existing national laws. It is to help companies to reap the full benefits of the Internal Market, while ensuring an equivalent, effective and proportionate protection of shareholders and third parties throughout the Union. The European legislative framework, which covers some four million limited liability companies, focuses on harmonising key aspects of national laws. Much has been achieved since the First Company law Directive in 1968, which tackled harmonisation of safeguards for shareholders and creditors. More remains to be done, both to modernise the existing framework and to complete it, with a view to strengthening the Internal Market and enhancing the rights of shareholders and third parties. Action is required to facilitate the mobility of companies across national EU, maximise the benefits of modern technologies where appropriate, enhance shareholders’ rights and modernise creditor protection frameworks. These are the main objectives of current and planned initiatives at European level, as expressed in the Commission’s Communication of 21 May 2003: Modernising Company law and Enhancing Corporate Government: a Plan to Move Forward”.

*

Commissioner for Internal Market and Services.

VII

Foreword

The modernisation of the existing framework as well as new EU company law instruments should fully respect the subsidiarity and proportionality principles of the Treaty. It should also reflect a flexible approach to harmonisation, relying on national law whenever there is sufficient equivalence between national systems. This flexible approach, which has characterised the EU company law legislative process since 1992, facilitated the adoption in 2001 of the European Company Statute, to which a chapter of this book is dedicated. EU company law will help companies benefit fully from the opportunities which the

Internal Market offers them. Yet, even though harmonisation and convergence help simplify the regulatory environment of businesses active in the Internal Market, the diversity of regulatory regimes and legal forms will remain. Creating an Internal Market is not only about creating regulatory frameworks, it is also about getting to know one’s neighbours. Books like “Corporate Business Forms in Europe” shed a useful light on companies in Europe and the way they operate and make a valuable contribution to mutual awareness in the field of company law.

Preface Frank Dornseifer “Daily Mail”, “Centros”, “berseering” and “Inspire Art”: The ECJ has triggered competition between the EU corporate legal systems by applying the principle of freedom of establishment step by step. Entrepreneurs and investors within the EU can now choose between the different corporate legal forms of the various member states when deciding where and how to carry out their business. It is now no longer uncommon to use foreign business forms instead of those provided for by the resident country. In a next step the proposed directive concerning the transfer of the registered office of a company from one member state to another under perpetuation of its legal personality will enhance the globalisation of corporate business forms. And finally the European company forms, the Societas Europaea (SE) of which several have in the meantime been established and the European Private Company whose statute is currently in the legislative forum, have to prove their competitiveness compared to national business forms which have been well in place for numerous decades. Thus, in the newly enlarged Europe understanding the corporate legal systems in the various countries is of paramount significance for all market participants and it is the basis for the further harmonisation of company law. It is this issue, the understanding and development of an integrated European company law, which this compendium seeks to contribute to. The aim of this work is to provide to practitioners as well as to students and scientists a profound review and description of the most important types of corporate business forms in a multitude of European countries. Entrepreneurs, legal counsels and lawyers shall find assistance when dealing with foreign companies and scientists shall find a systematic explanation of the functioning of companies for purposes of comparing and harmonizing company law. In its function as a reference book this work shall provide practical information concerning companies starting with the formation and ending with the winding up for each type of business form presented. In the course of this, “Corporate Business Forms in Europe” does not just give an overview but also detailed explanations for technical matters such as capital increase/decrease, financial reporting, taxation, take-overs, etc. However, as the range of business forms is too large to include all of them in this work which already covers 15 countries in Europe, the main focus is on public and private limited liability companies and variations thereof. Other business forms such as partnerships are, however, also briefly presented for each country in order to give at least an overview. The objective of this work does not simply end with this book. The idea behind it shall continue. It is intended to establish a forum for an ongoing discussion in corporate law matters in Europe. The “Corporate Law Forum” is therefore in the process of being established in order to enhance this discussion. In a first step this forum shall function as a virtual platform in the internet (www.corporate-law-forum.net), but there is more to come. IX

Preface

Finally, there are two important people to whom I would like to express my gratitude. The first is Ms. Francoise Blanquet, former Magistrate and Adviser to the Commission (Directorate General Internal Market), responsible for the SE, who was so kind to contribute an introduction to the European Company Statute in this book. The second person is Mr. Patrick Sellier for his support, patience and finally for his willingness to accompany the vision of this project to its realization. Dsseldorf, June 2005

Table of Contents List of Authors Foreword Preface

V

VII IX

European Company Statute (SE) Franc¸oise Blanquet

Czech Republic

11

Martin Holler

England

59

Jeff McGeachie

Estonia

107

Ermo Kosk/Peeter Lepik

France

169

Cecilia Della Berta

Germany

211

Frank Dornseifer

Greece

295

Vasiliki Vavitsa-Hohenau

Ireland

387

Paula Phelan

Italy

447

Mara Bolzoni

Lithuania

505

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

Netherlands

551

Duco Ottevangers

1

Table of Contents

Norway

611

Jo Rodin

Poland

659

Michał Lachert/Jacek Bondarewski/Joanna Łysak/Agnieszka Szydlik

Slovak Republic Slavomı´r Cˇauder

Spain

723

771

Israel Garcı´a Rico

Switzerland

809

Adrian Do¨rig

Annexes Table of Limited Liability Companies and hybrid forms thereof 892 Main characteristics of Private Limited Liability Companies 894

European Company Statute (SE) Franoise Blanquet

Table of Contents I.

Introduction

1. 2.

Why a European Company? What about worker involvement?

II. The Texts adopted Which companies will have the right to form an SE? 2. What operations not currently possible for national companies are available to an SE? a) Cross-border mergers

1 1 2 3

1.

I.

Introduction

1.

Why a European Company?

3

5 5

b) Transfer of the registered office to another Member State was also provided for by the Statute for a European Company (Article 8) 3. What system of taxation will apply to the SE? a) The principle b) Details

III. Conclusions

6 8 8 8 9

Since 8 October 2004 it is possible to register a European company “SE” in all 1 Member States having adopted all necessary measures. The European Company (known by its Latin name of ‘Societas Europaea’ or SE) became a reality some 35 years after it was first proposed. The SE gives companies operating in more than one Member State the option of being established as a single company under Community law and so able to operate throughout the EU with one set of rules and a unified management and reporting system rather than all the different national laws of each Member State where they have subsidiaries. For companies active across the Internal Market, the European Company therefore offers the prospect of reduced administrative costs and a legal structure adapted to the Internal Market as a whole. The formal adoption follows the opinion given by the European Parliament in September 2001 on the two amended texts, on which the Council reached political agreement in December 2000. Under the European Company Statute, a European Company can be set up by the 2 merger of companies located in at least two Member States or by the creation of a holding company or a joint subsidiary or by the conversion of an existing company set up under national law.

Franoise Blanquet

1

3

European Company Statute (SE)

I. Introduction

3 The SE, would also enable groups of companies which have developed activities in different industries in various Member States to restructure by creating one SE for each geographical sector, one SE for each sector of activity and one SE for each product line, thus permitting more efficient and less costly management and leading to productivity gains which, it is estimated, will even surpass the economies of scale achieved. 4 With the introduction of the Euro, the SE is regarded as a necessary instrument within economic and monetary union in terms of competition for access to capital. In particular, the usefulness of the SE, is often underlined in order to attract investors and to raise the private capital necessary for cross-border projects (in particular, transport, energy and telecommunications infrastructure), with or without the injection of public funds. 5 SE status will enable companies with commercial interests in more than one Member State to move across national borders within the Community as their business requires without having to comply with the complex and costly procedures of dissolution in their country of incorporation and re-incorporation as a new legal entity in the country to which they wish to move. None of these advantages is currently available under the national laws in force. 6 The SE offers companies a “European flag”, which some companies interested in the SE value in publicity terms. It is also a way of removing the psychological obstacle connected with the change of nationality: the company which emerges from the operation will be “European”.

2.

What about worker involvement?

7 Under the Directive on worker involvement, the creation of a European Company would require negotiations on the involvement of employees with a body representing all employees of the companies concerned. If it proved impossible to negotiate a mutually satisfactory arrangement then a set of standard principles, laid down in an annexe to the Directive would apply. Essentially these principles oblige SE managers to provide regular reports on the basis of which there must be regular consultation of and information to a body representing the companies’ employees. These reports must detail the companies’ current and future business plans, production and sales levels, implications of these for the workforce, management changes, mergers, divestments, potential closures and layoffs. 8 In certain circumstances, where managers and employee representatives were unable to negotiate a mutually satisfactory agreement and where the companies involved in the creation of an SE were previously covered by participation rules, a European Company would be obliged to apply standard principles on participation of its workers. This would be the case of a European Company created as a holding company or joint venture when a majority of the employees had the right, prior to the creation of the SE, to participate in company decisions. 9 In the case of a European Company created by a merger, the standard principles on participation of its workers would have to be applied when at least 25% of employees 2

Franoise Blanquet

1. Which companies will have the right to form an SE?

European Company Statute (SE)

10

had the right to participate before the merger. It is on this element that agreement on the Directive had, until the Nice Summit in December 2000, not proved possible. The compromise struck by Heads of State and Government was to authorise a Member State not to implement the Directive on participation in the case of SEs created by merger, but in that case the SE could be registered in that Member State only if an agreement was concluded or when no employees were covered by participation rules before the SE was created. This compromise was endorsed by the Council on 20 December 2000. In the case of a transformation of a national company into an SE, the arrangements 10 for worker participation applied by this national company prior to its transformation as a European Company would have to continue to apply.

II. The Texts adopted The new SE laws entered into force on the same day on 8 October 2004 and it seems a good 11 idea to answer some of the questions asked by Member States and companies as they prepare for the SE.

1.

Which companies will have the right to form an SE?

This question is often asked by American or Japanese companies that would like to form 12 an SE in order to develop their activities in the Community through one of their subsidiaries in the Union. As a result of the SE, the subsidiary of an American or Japanese company that is 13 registered according to the law of a Member State will be able to form an SE by means of a merger or to set up a holding SE or a joint subsidiary SE with a company governed by the law of another Member State that could itself be the subsidiary of an American or Japanese company (of the same group or a different group). For example, “Toyota France” could form an SE, “Toyota SE”, with “Toyota Germany” 14 or an SE, “Toyota-Chrysler SE”, with “Chrysler-France”. (Readers will understand that these purely imaginary examples are given only by way of illustration.) The same question is also asked by companies registered in the Netherlands, the United 15 Kingdom or Ireland, where companies are subject to the law of these countries solely by dint of being registered there, although their head office may be outside the Community, e.g. in the Netherlands Antilles or some other tax haven. The General Programme for the abolition of restrictions on freedom of establish- 16 ment1 adopted by the Council in 1962 stated in this connection that companies which are simply registered in the Community without having their centre of admin1

OJ No 2, 15. 1. 1962.

Franoise Blanquet

3

17

European Company Statute (SE)

II. The Texts adopted

istration there benefit from freedom of establishment provided that ‘‘their activity shows a real and continuous link with the economy of a Member State’’. 17 This form of words was also adopted for the SE (Article 2(5)).2 Thus, as the Court of Justice recalled in its famous ‘‘Centros’’ judgement,3 a company which merely has its registered office in the United Kingdom but carries on its entire business in Denmark through a branch is indeed a British company which escapes the company law applicable to Danish companies (in this instance, the requirement to pay up a minimum share capital). 18 The Regulation would not, however, authorise such a company to be transformed into an SE. For, contrary to the Commission proposal (which followed the opinion of the European Parliament), the Council considered that a mere branch in another Member State did not provide sufficient proof of the transnational nature of the operation; this could be provided only by a subsidiary company in another Member State (Article 2(4)). 19 Article 2(4) would, however, authorise a company registered in the United Kingdom and which has its registered office and head office “within the Community” (in Denmark?) to be transformed into an SE if for at least two years it had had a subsidiary company in a Member State other than the United Kingdom. 20 Similarly, the Regulation would authorise a British company whose “activity shows a real and continuous link with the economy of a Member State” to form an SE with, say, a Danish company (company of a different Member State): – by way of a merger (in the case of a public limited-liability company) – by way of a holding (in the case of a private limited-liability company) or – by way of a joint subsidiary (in the case of a company or other legal entity, e.g. an EIG). 21 A holding SE or a joint subsidiary SE could also be formed by two companies of the same Member State each of which had for at least two years an establishment situated in another Member State (Article 2(2) and (3)). For example, “Toyota France” or “Chrysler France” could form a subsidiary SE or a holding SE if it had a branch in another Member State. 22 This provision should help small and medium-sized enterprises (SMEs) to develop their business across borders by setting up an SE after having provided evidence of the transnational nature of their business in the form of a simple branch in another Member State: for example, two Belgian chocolate makers could form a holding SE or a joint subsidiary SE on the grounds that they had a branch in France. 2

3

“A Member State may provide that a company the head office of which is not in the Community may participate in the formation of an SE provided that company is formed under the law of a Member State, has its registered office in that Member State and has a real and continuous link with a Member State’s economy.” Case C-217/97 Centros Ltd v Erhvervs-og Selskabsstyrelsen [1999] ECR I-1459.

4

Franoise Blanquet

2. What operations not currently possible for national

2.

European Company Statute (SE)

23

What operations not currently possible for national companies are available to an SE?

National companies are still unable to carry out two types of cross-border operation 23 envisaged by the Treaty of Rome: – Cross-border mergers – Transfer of their registered office to another Member State without dissolving (winding up) the company. a)

Cross-border mergers

The Treaty of Rome (Article 220) provided that Member States would enter into 24 negotiations with each other with a view to securing “the possibility of mergers between companies or firms governed by the laws of different countries”. No such agreement was concluded despite the efforts of Professor Bertold Goldman, who chaired the group of government experts. A proposal for a 10th Directive, published by the Commission in 1985,4 was equally unsuccessful since it was blocked by the European Parliament even before it could be discussed by the Council working parties. The issue of cross-border mergers was re-opened by the Council discussions on the 25 Statute for a European Company. Indeed, cross-border mergers were considered the perfect route for creating an SE by acquisition or by forming a new company between companies of different Member States after the Third Directive of 19785 had harmonised the law on mergers between companies governed by the same national legislation. It became apparent that, by a complete pooling of assets, only cross-border mergers 26 would enable independent companies to attain the high degree concentration necessary to cope with the globalisation of business and would have the advantage in relation to a public take-over bid of permitting total control of the company acquired without regard to the financial rights of minority shareholders and without any payments being made to the shareholders of the acquired company. Cross-border mergers are also seen as a useful way of restructuring groups by enabling 27 parent companies to wind up their subsidiaries in the different Member States at no cost and, in so doing, to achieve economies of scale by replacing them by agencies or branches with low operating costs. The Council agreed with this analysis and on 23 July 1990 adopted a Directive on the common system of taxation applicable in particular to mergers concerning companies of different Member States.6 It is true that this text has not yet been applied owing to the absence of parallel company law rules for such mergers. The texts on cross-border mergers were closely modelled on those of the Third Direc- 28 tive, which concerned national mergers. However, it very quickly became apparent to the Council that the patchwork of national transposal laws arising out of the options 4 5 6

OJ C 23, 25. 1. 1985, p. 11. Directive 78/855/ EEC of 9 October 1978 (OJ L 295, 20. 10. 1978, p. 36). Directive 90/434 / EEC, OJ L 225, 20. 8. 1990, p. 1.

Franoise Blanquet

5

29

European Company Statute (SE)

II. The Texts adopted

still open to the Member States would not be sufficient to regulate the entire crossborder merger operation: it was necessary to create a “Community bridge” that no Member State could put in place on its own7 (see point 3). 29 In the absence of legislation organising cross-border mergers, these operations are currently possible only if backed up by complicated legal arrangements. The case traditionally cited in relation to the United Kingdom and France is the cross-border merger between Barclays Bank SA, the British parent company, and its French subsidiary, which it was able to acquire and thus transform into a branch. In this way, Barclays was able to benefit from the second banking Directive, which since 1 January 1993 has enabled a bank of one Member State to operate in another Member States merely through a branch. This merger does not mean that the legislation in place would permit a French company to acquire a British company. It is a fact that a merger could not be achieved between companies of different Member States (Germany, the Netherlands, Sweden, Ireland, Greece, Finland, Denmark and Austria) and even a Belgian company could not be acquired by a company of another Member State. b)

Transfer of the registered office to another Member State8 was also provided for by the Statute for a European Company (Article 8)

30 The Treaty of Rome (Article 220) had provided that “the retention of legal personality (of companies) in the event of transfer of their seat from one country to another” would be achieved by means of agreements between Member States. But no agreement was concluded. 31 It is, however, highly unusual for the legal systems of the Member States to make explicit provision for companies registered in their territory to transfer their registered office to another Member State without being wound up and with retention of the company’s legal personality. Italy enables companies to do so subject to reciprocity, as does Portugal provided that the operation is permitted by the law of the country to which the registered office is being transferred. French law makes this conditional on the conclusion of international agreements, although no such agreements have ever been concluded. The German legal system explicitly rules out this possibility a priori, while the laws of the other Member States do not even take it into consideration. 32 The Regulation imposes on SEs the obligation that, after their formation, they must have their registered office and their head office in the same Member State (real seat). Some Member States are even authorised to require the registered office and the head office to be located “in the same place” (e.g. Frankfurt) (Article 7). 33 Any transfer of an SE’s registered office to another Member State must therefore be accompanied by the transfer of its head office and failure to comply with this obligation would be grounds for liquidating the SE (Article 64). 7

8

F. Blanquet – Revue Socits, January-March 2000 – “Les fusions transfrontalires et la mobilit des socits” (“Cross-border mergers and company mobility”), pp. 115 to 128. F. Blanquet, op. cit., pp. 115 to 128.

6

Franoise Blanquet

2. What operations not currently possible for national

European Company Statute (SE)

34

Agreement on this component of the “backbone” of the Regulation was difficult to 34 obtain from the so-called “registered-office Member States”, where registration alone determines the law applicable (the United Kingdom, Ireland and the Netherlands), and this opens the way for “letterbox” companies. The “real-seat Member States”, which require the head office to be in the same country as the registered office, were concerned that the monitoring of companies subject to the registration requirement would not be easy within the territory of another Member State where the head office was located unless the law of that Member State could apply with a view to monitoring the foreign company. It should be noted that this “real seat” solution is already in force in all the Member States 35 for the implementation of certain Community texts which require it. For example, the Regulation on the EEIG9 requires that the official address of the EEIG must be fixed where the grouping has its central administration (Article 12), while the Directive relating to undertakings for collective investment in transferable securities10 states that the Member States must require that the head office be situated in the same Member State as the registered office (Article 3). The transfer of the registered office of an SE does not result in the winding up of the SE 36 or in the creation of a new legal person (Article 8(1)). This provision of a Community Regulation is not compatible with the application of the tax laws of most Member States, which currently tax the transfer of the registered office “as if ” the company were being wound up. It is true that such practices would form a very effective obstacle to any transfer by an SE of its registered office. Article 8 of the Regulation lays down a number of guarantees and requires publicity 37 with the aim of providing information on the proposed transfer and its implications for shareholders, creditors and employees. A report drawn up by the management must explain and justify the legal and economic aspects of the transfer and its implications for shareholders, creditors and employees. Shareholders and creditors are entitled, one month before the general meeting that will decide on the transfer at a qualified majority, to examine the transfer proposal and the report. Member States may adopt provisions designed to ensure appropriate protection for minority shareholders who stated their opposition to a transfer at the general meeting. After the decision has been adopted by the general meeting and according to the 38 procedure already described in the event of a merger, the court, notary or other competent authority is required to issue a certificate “attesting to the completion of the acts and formalities to be accomplished before the transfer” (according to the law applicable to the SE before the transfer). The new registration may not be effected until the certificate has been submitted and until evidence has been produced that the formalities required for registration in the country of the new registered office have been completed. 9

10

Council Regulation (EEC) No 2137/85 of 25 July 1985 on the European Economic Interest Grouping (EEIG) (OJ L 1991, 31. 7. 1985, p. 1). Directive 85/611 / EEC of 20 December 1985 on UCITS (OJ L 375, 31. 12. 85).

Franoise Blanquet

7

39

European Company Statute (SE)

3.

What system of taxation will apply to the SE?

II. The Texts adopted

39 This is THE number one question for heads of companies who would like a Community Regulation to be accompanied by tax advantages for those who opt for this new Community structure. 40 The question is also asked by those who would like the SE to be accompanied at least by tax measures making it possible to opt for the Statute for an SE without being penalised: specific tax treatment. 41 In all its initiatives the Commission takes care to avoid distortions of competition between firms and to ensure the neutrality of tax treatment, whatever the form of the company: the SE should not be chosen on the basis of its tax advantages, but rather for its intrinsic advantage under company law which permits the establishment of a Community legal framework instead of a complex and costly network of subsidiaries governed by different national laws. Nevertheless, care must be taken to avoid penalising SEs. a)

The principle

42 European companies will be treated in the same way as any other multinational business, i.e. they will be subject to the national tax legislation applicable at the level of the company and its establishments. b)

Details

43 An SE formed by means of a merger, registered in a particular Member State and doing business via establishments set up in various countries will enjoy a tax advantage linked to the fact that it operates a number of establishments. This is because, if its overall profit is taxed in the Member State in which its registered office is located, it will be able to write off the losses of certain permanent establishments against the profits recorded by the company. In practice, this is rarely possible if the parent company is an independent entity operating via subsidiaries with their own legal personality. 44 An SE formed by means of a merger will be the first type of company to be able to benefit from the Directive on the common system of taxation applicable to mergers, divisions, transfers of assets and exchanges of shares concerning companies of different Member States (90/434 / CEE). This Directive provides for taxation solely of the capital gains realised at the time of the merger, and not of the latent capital gains, provided that a permanent establishment is maintained in the Member State in which the company was registered before the merger. However, a technical amendment of the Directive will be required in order to add the SE to the categories of companies falling within its scope. 45 The same applies to the avoidance of double taxation in the event of the distribution of profits between companies under Directive 90/435/ CEE.11 11

8

OJ L 225, 20. 8. 1990.

Franoise Blanquet

3. What system of taxation will apply to the SE?

European Company Statute (SE)

46

The SE will also have to be added to the list of companies covered by the future 46 Directive on the avoidance of taxation on interest and royalties paid between companies within the same group. This Directive was approved at the Ecofin Council meeting of 26-27 November 2000. SEs will also benefit from the tax conventions in force in the Member States in which 47 they are situated and from the Arbitration Convention (90/436 / CEE), the purpose of

which is to eliminate double taxation in connection with the adjustment of profits of associated enterprises and which applies to all forms of enterprise and thus also to the SE (Article 4). Once it has been set up, an SE will be able to transfer its registered office to another 48 Member State without winding itself up and while maintaining its legal personality. Steps will have to be taken to prevent tax laws currently in force from continuing to tax such a transfer “as if ” it were tantamount to a winding-up operation. If that were to happen, tax measures should be taken by the Council, along the lines of those adopted for mergers, so as to ensure that only realised and not latent capital gains are taxed provided that a permanent establishment is maintained in the Member State in which the registered office was originally situated.

III. Conclusions The text of the Regulation contains 70 articles. The 1970 and 1975 versions had almost 49 300. The SE is no longer this huge liner adrift way outside Member States’ territorial waters which nobody could board. It has turned into a cruise ship which is leaving its home port to call in at ports in the Member States and take on board anybody who wishes to join the cruise. – The new Statute is unquestionably an improvement in terms of flexibility and simplicity. It has shaken off the constraints represented by the mandatory rules governing groups (which today exist only in German and Portuguese law), by compulsory participation in the company’s organs (which only seven Member States have introduced according to a general principle of minority participation, except in Germany, where there is parity between employers’ and employees’ representatives) and by a compulsory two-tier system (which only very few Member States have incorporated into their legislation). – The new Statute also represents an improvement in terms of openness, in particular towards SMEs: the minimum capital required in 1970 was considerable in the case of a merger, i.e. ECU 500,000, but was reduced to ECU 250,000 in the 1975 version. It is now only J 120,000, an amount which is within reach of most firms wishing to develop their cross-border business. Access has even been opened up to foreign companies with their central administration and strategic decision-making centres outside the EU on the sole condition that they be registered in a Member State and have “a real and continuous link with a Member State’s economy”, which simply means an establishment within the EU. One can no longer talk of “fortress Europe”. Japanese and US groups have understood this and are showing mounting interest in Franoise Blanquet

9

49

European Company Statute (SE)

III. Conclusions

this new legal option as a means of reinforcing their European image, reducing their operating costs and improving their efficiency. They have long called for a means of operating a single company with numerous establishments rather than a complex network of subsidiaries subject to as many legal systems as there are Member States, with a single balance sheet, a single tax declaration and European employees. The new Statute has also gained in openness in that it authorises a national company which proves its European credentials by having operated a subsidiary for at least two years in another Member State to be transformed into an SE. – The Directive has also been made more flexible in order to take account of the diversity of national traditions. One Member State is even authorised not to transpose the provisions on employee participation in the case of a merger if it prefers to be deprived of the right to register an SE rather than to incorporate into its domestic law the right of a minority to impose its participation model on a majority of the SE’s employees. Tailor-made agreements which have been concluded between fully autonomous parties, respect the company culture and create an esprit de corps between “European employees” are also an indication of this new flexibility. If no agreement is reached, the standard rules also take account of the different traditions. The Directive’s aim is, therefore, not to export participation to countries in which it does not exist but to preserve the acquired rights of employees according to the “before and after” principle” described in recital 18 of the Directive. – The new Statute has also become a more attractive proposition, with many groups now taking an interest in it. They insist that the simplification of their structure will make financial markets more transparent and will offer SEs greater visibility on the European and international scene. They also believe that the formation of an SE will strengthen some firms and thus enable them to withstand hostile take-over bids and that significant economies of scale and even greater productivity gains will be achievable. While there are still prophets of doom who predict that the SE will attract scant interest, the European companies that will be created will prove them wrong, thereby confirming the prophecy of Viscount Etienne Davignon when he said that ‘‘the day when a real need emerges will be the day when a genuine effort will be made to meet it’’.12 12

10

Cf. more recently “Vers la Socit europenne” by Viscount Etienne Davignon and Bruno Roger : “It is vital that managers of large European groups tell us how much they appreciate this step forward achieved at the Nice summit”, Le Monde, 17 February 2001.

Franoise Blanquet

Czech Republic Martin Holler

Table of Contents I.

Introduction

II. Joint Stock Company 1.

a) b) c) d) 2. a) b) c) d) e) f) 3. a)

b)

c) d)

Basic Characteristics of a Joint Stock Company (“akciov spolecˇnost” or “a. s.”) Basic Structure of a Joint Stock Company Number of Shareholders Registered Capital Significance of the Joint Stock Company in Czech Business Life Formation of a Joint Stock Company Formation Procedure Registration Procedure Further Approval Requirements Shelf Companies Costs and Duration Company Stationary Shareholders Rights and Obligations of the Shareholders of a Joint Stock Company aa) Basic Rights bb) Basic Obligations General Meeting of the Shareholders aa) Necessary Majority bb) Restriction on Shareholders’ Rights to vote cc) The Course of the General Meeting dd) Challenge of Decisions of the General Meeting The Shares of a Joint Stock Company Classes of Shares aa) Outlay of the Shares bb) Form of Shares

Martin Holler

14 15

e) f)

15

g)

15 16 16

4. a) b) c) d)

16 16 16 18 18 19 19 20 20

20 20 21 22 22 23 24 25 25 25 25 26

5. a) b) 6. a) b) 7. a) b) c)

8. a) b) c) 9. a) b) c)

cc) Type of Shares dd) Collective Shares Transfer of Shares Acquisition of Own Shares by the Company Other Securities Issued by a Joint Stock Company The Articles of Association Mandatory Content Optional Provisions Change of the Articles of Association Increase and Decrease of the Registered Capital of the Joint Stock Company aa) Increase of the Registered Capital bb) Decrease of the Registered Capital The Board of Directors Members of the Board of Directors Management and Representation Supervisory Board Members of the Supervisory Board Competence Selected Capitalization and Liability Questions Capitalization of the Receivable Liabilities of the Joint Stock Company Special Relations Between the Company and the Members of Its Bodies Accounting Financial Statements Audit Requirements Reserves Taxation Corporate Income Tax Value Added Tax Other Taxes

26 26 27 27 28 28 28 29 29 30 30 31 31 31 32 33 33 33 34 34 34

34 35 35 35 36 36 36 36 36

11

Czech Republic 10. a) b) 11. 12.

Termination of the Business Dissolution of the Company Liquidation of the Company Insolvency Choice of Seat Outside the Czech Republic

III. Limited Liability Company 1. a) b) c) d) 2. a) b) c) d) e) f) 3. a)

c)

12

Basic Characteristics of a Limited Liability Company Basic Structure of a Limited Liability Company Number of Shareholders Registered Capital Significance of the Limited Liability Company in Czech Business Life Formation of a Limited Liability Company Formation Procedure Registration Procedure Further Approval Requirements Shelf Companies Costs and Duration Company Stationary Shareholders Rights and Obligations of the Shareholders of a Limited Liability Company aa) Basic Rights bb) Basic Obligations cc) Shareholders’ Meeting dd) Necessary Majority ee) Restriction on Shareholders’ Rights to Vote ff) The Course of the Shareholders’ Meeting gg) Challenge of Decisions of the Shareholders’ Meeting hh) Shareholders’ Decisions without Shareholders’ Meeting Ownership Interest of a Limited Liability Company

Table of Contents 36 37 37 38 38 38 38 39 39 39 40 40 40 41 42 42 42 43 43

43 43 44 45 45

d) Transfer of Ownership Interest e) Acquisition of Its Own Ownership Interest by the Company 4. The Shareholders’ Agreement a) Mandatory Content b) Optional Provisions c) Change of the Shareholders’ Agreement d) Increase and Decrease of the Registered Capital of the Limited Liability Company aa) Increase of the Registered Capital bb) Decrease of the Registered Capital 5. The Managing Director(s) a) Management and Representation 6. Supervisory Board a) Members b) Competence 7. Liabilities of the Limited Liability Company a) Special Relations Between the Company and the Managing Directors 8. Accounting a) Financial Statements b) Audit Requirements c) Reserves 9. Taxation a) Corporate Income Tax b) Value Added Tax c) Other Taxes 10. Termination of the business a) Dissolution of the Company b) Liquidation of the Company

48 49 49 49 49 50

50 50 51 51 52 52 52 52 53 53 53 53 54 54 54 55 55 55 55 55 56

45

IV. Other Corporate Forms in the

Czech Republic

47

56 56 57

47

1. 2.

Commercial Partnership Limited Partnership

47

V. Branch Office of Foreign Entity

in the Czech Republic

58

48

Martin Holler

Index

Czech Republic

Index Accounting Year 43, 128, 187, 245 Agreement on Performance of Function 101, 228 Audit 131, 248 Board of Directors 8, 18, 22, 23, 32, 33, 36, 37, 43, 49-52, 54, 59, 77, 81, 84, 92, 95, 97, 99-107, 111, 112, 115, 117, 123, 125, 134, 148 Commercial Register 14, 20-4, 26, 29-31, 59, 76, 85, 90, 92 105, 111, 139, 142, 146, 151, 152, 158, 164-8, 170-1, 173-5, 201, 208, 217, 224, 232, 239, 253, 256, 260, 265 Contribution 7, 16-19, 23, 37, 46, 49, 89, 90, 92, 118, 120, 152, 159, 162, 163, 166, 167, 183, 186, 190, 204, 205, 209, 212, 214, 219-222, 224, 239, 265, 266, 267 Contribution, in Kind 16, 46, 49, 90, 118, 160, 162 Contribution, Monetary 16, 89, 90, 92, 162, 166, 183, 219 Corporate Income Tax 136, 252 European Union 2, 103, 150, 230 Financial Statements 53, 93, 113, 126-132, 144, 179, 194, 207, 223, 237, 243-9, 258 Foreigner 103, 230 Foundation 18, 19, 22, 23, 159, 166, 201 Foundation Deed 159, 166, 201, 202 Foundation Meeting 18, 19, 22, 23 General Meeting 32, 33, 35, 36, 43-60, 65, 70, 71, 79, 80, 84, 85, 87, 89-91, 95, 96, 100, 101, 105, 109, 114, 120, 124, 125, 141, 143, 171 Liquidation 45, 73, 139, 142-146, 253, 256-260 Liquidators 54, 62, 143, 144, 146, 195, 201, 257 Loan 125, 242 Managing Director 153, 160, 165-8, 171, 176, 180-2, 185, 190, 191, 193, 201, 202, 211, 212, 216, 224, 226-233, 235, 236, 240-2, 251, 255 Notarial Deed 23, 28, 86, 159, 171, 172, 188, 218 Notary Fees 28, 172

Martin Holler

Ownership Interest 170, 171, 177, 178, 181, 184, 198, 204-210, 224 Registered Capital 5, 7, 11, 12, 15-18, 22, 28, 36, 37, 43-46, 51, 61, 63, 65, 71-3, 78, 82, 85, 118-121, 132-4, 152, 156, 160, 162, 172, 181-4, 186, 188, 204, 205, 209, 212, 217, 250 Registered Capital, Decrease 96-98, 192, 217, 225, 226 Registered Capital, Increase 87-95, 192, 217, 219-224 Registration 14, 19-24, 26, 29-31, 37, 54, 68, 69, 76, 85, 92, 151, 158, 163-168, 170, 171, 173-175, 183, 217, 224, 239 Reserve Fund 71, 82, 132-134, 141, 249-251, 255 Shareholders 7, 8, 10, 14, 17-19, 21, 32-76, 91-93, 122, 140, 144, 152-4, 158-168, 171, 176-211, 215, 239, 241, 242, 249, 250, 254, 255, 258, 260, 268 Shareholders’ Agreement 159, 160, 163, 166, 177, 183-5, 187, 188, 191, 192, 198, 199, 201, 206, 207, 211-226, 231, 232, 234, 249, 250, 267 Shareholders’ Meeting 177, 180, 181, 183-186, 190, 192, 193, 197-202, 218, 219, 221, 238, 255 Shares 7, 9, 11, 15-17, 23, 33, 34, 36-39, 41-44, 46, 47, 61-79, 82, 83, 85, 88-95, 98, 99 Shelf Company (-ies) 26, 27, 170, 171 Sole Shareholder 9, 60, 99, 154, 203, 206 Statutory Body 8, 102, 104, 143, 147, 148, 229, 257, 264, 268 Supervisory Board 8, 18, 23, 49, 50, 52, 54, 59, 77, 80, 81, 100, 105, 106, 108-117, 125, 153, 160, 167, 191, 193, 201, 211, 213, 234-8, 242 Trade Licenses 3, 20, 22, 23, 25, 26, 102, 164, 166, 167, 169, 229 Transfer of Ownership Interest 170, 206-8 Transfer of Shares 67-70 Value Added Tax 137, 252 Voting Rights 41, 42, 48, 50, 74, 189, 191

13

1

I.

Czech Republic

I. Introduction

Introduction

1 Corporate law in the Czech Republic has a long tradition. Following the fall of the communist regime in 1989, the relevant business law has been substantially revised and changed, following democratic principles and supporting the spirit of free enterprise. In this process of transformation, Czech law returned to its original roots, which were severed after the communistic coup in 1948. At that time the continuity of the traditional legal system was interrupted Traditional codes were abolished and new socialistic codifications were accepted. 2 Czech business law is part of the central-European legal culture, originating from the Austrian and German legal system. After the establishment of an independent Czechoslovakia in 1918, the existing Austrian legal system remained observed and was further developed. The Austrian Commercial Code introduced into Czech law the basic conceptions of corporate and obligation law, which remain visible until this day. Accession to the European Union had a major impact on the Czech legal system. The necessary adoption of the common body of the European laws, the acquis communautaire, meant that numerous new legal rules had to be introduced into the legal system in the Czech Republic. During 2003 and 2004 a so-called “legislative storm” took place, which brought into the Czech law a large number of new, not always positively accepted rules. Today 90 % of the Czech legislation is fully compatible with the sources of European law. 3 The legal framework of the corporate system is principally set out by two basic codes: the Commercial* Code1 and the Civil Code.2 Of course corporate law is also affected by a number of special legal rules, such as the Act on Trade Licenses. 3 4 The corporate forms in the Czech Republic may be divided into two types – the traditional ones and the European ones. The first category, which is the subject of this work, represents four corporate forms – the joint stock company,4 the company with limited liability,5 the commercial partnership6 and the limited partnership.7 As of January 1, 2005 Czech law also recognizes the European society and European economic interest group. 5 In general, legal forms for corporations in the Czech Republic may be distinguished between those, which are limited by shares and those made up of individual partners. *

1 2 3 4 5 6 7

14

The author would like to thank Mgr. Markta Sˇtfkov for her major contribution to this article. Act no. 513/1991 Coll., as amended. Act no. 40/1964 Coll., as amended. Act no. 455/1991 Coll., as amended. Czech, ‘‘akciova´ spolecˇnost’’. Czech, ‘‘spolecˇnost s rucˇenı´m omezeny´m’’. Czech, ‘‘verˇejna´ obchodnı´ spolecˇnost’’. Czech, ‘‘komanditnı´ spolecˇnost’’.

Martin Holler

1. Basic Characteristics of a Joint Stock Company

Czech Republic

6

Companies with a capital ground are based on a firmly stated registered capital. The typical representatives of this form of companies are the joint stock company and the limited liability company. The companies with a personal ground depend on the individuals, which are firmly connected with the existence of the company. The respective corporate forms are the commercial partnership and the limited partnership. In Czech business life today, by far the most important corporate forms are the joint 6 stock company and the company with limited liability. 90 % of all enterprises in the Czech Republic are organized as limited liability companies and an additional 6% as joint stock companies. These two corporate forms are also most commonly chosen by foreign investors on the Czech market.

II. Joint Stock Company 1.

Basic Characteristics of a Joint Stock Company (“akciov spolecˇnost” or “a. s.”)

A joint stock company under Czech law may be described as a capital based company 7 with a certain registered capital, which is divided into a certain number of shares. The basic principles of a joint stock company are the following: – the obligation of the shareholders to make a contribution to the registered capital of the company; – the obligation of the company to have a certain registered capital; – the participation in the management of the company by the shareholders solely through certain bodies of the company; – no liability of the shareholders for the obligations of the company; – any loss of the company is basically not allocated among the shareholders. a)

Basic Structure of a Joint Stock Company

A joint stock company is characterized by a strict division between the enterprise part 8 of the company and the capital part of the company. This principle is reflected in the basic structure of the company, which consists of three statutory bodies. The enterprise of the company is managed by the board of directors,8 which represents the company vis--vis third parties. In contrast, the influence of the shareholders, who represent the capital part of the company is limited to their participation in the general meeting9 of the company. The activities of the board of directors are overseen by the third statutory body of the company, the supervisory board.10

8 9 10

Czech ‘‘prˇedstavenstvo’’. Czech ‘‘valna´ hromada’’. Czech ‘‘dozorcˇı´ rada’’.

Martin Holler

15

9

b)

Czech Republic

II. Joint Stock Company

Number of Shareholders

9 A joint stock company may be founded by a single shareholder, but only in case that this sole shareholder itself is a legal entity. This limitation only applies to the establishment of a company. In case that during the existence of the company all shares are concentrated in the hands of a single person, this does not mean that the company ceases to exist or has to be liquidated, even if the single shareholder is a physical person.11 10 Under applicable Czech law there is no maximum number of shareholders of a joint stock company. b)

Registered Capital

11 The minimum amount of the registered capital of a joint stock company is CZK 2,000,000.12 In case the joint stock company is founded by a public offering of the shares, the minimum amount of the registered capital is raised to CZK 20,000,000. 12 Certain laws state that special institutions such as banks or insurance companies may only operate in the form of a joint stock company. Often these laws also require a higher minimum amount of registered capital for such institutions. c)

Significance of the Joint Stock Company in Czech Business Life

13 The joint stock company is one of the most common forms used by enterprises on the Czech market. The total number of joint stock companies in the Czech Republic amounted to 16,35113 as of September 30, 2004.

2.

Formation of a Joint Stock Company

a)

Formation Procedure

14 The formation of a joint stock company under Czech law may be divided into two major parts. First, the establishment by the shareholders and second, the registration in the Commercial Register. 15 The first step in the establishment procedure may be a public offer, in which the founder of the future company calls on the public to subscribe shares in the future company. Today in the Czech business life 99.9% of all joint stock companies are established 11

13

Section 162, Commercial Code. Until 01. 01. 2001 the minimum amount of the registered capital was CZK 1,000,000. The new minimum amount only applies to newly established companies. Consequently, there is still a large number of joint stock companies, which registered capital amounts to CZK 1,000,000 on the Czech market. Czech Statistical Office, Organizational statistics, Tab. no. 1, 01n2-04.

16

Martin Holler

12

2. Formation of a Joint Stock Company

Czech Republic

16

without such public offer. They are instead established based on a non-public offer, in which the founders themselves subscribe the shares for the whole amount of the registered capital of the future joint stock company. One of the most important decisions that the founders must make, is the agreement on 16 the articles of incorporation of the company14 under the applicable Czech law.15 The articles of incorporation must include a catalogue of specifications, namely the business name under which the future company shall operate, the seat of the company, its subject of business, the amount of the registered capital, the number of shares, the nominal value of each share, the type of shares, the number of shares to be subscribed by each shareholder, the issue rate, the method and time for repayment of the issue rate, the kind of the contribution to the registered capital by each shareholder, the approximate amount of the establishment cost and the name of the person who shall administer the contributions to the registered capital. The shareholders shall then make their contributions to the registered capital of the 17 company. Such contributions may either be monetary or in kind. Technically this means that the shareholders subscribe the shares. The next necessary step in the establishment process is the foundation meeting. This 18 meeting, to which all future shareholders who have duly made their respective contribution to the registered capital are to be invited, formally decides on the establishment of the company. The foundation meeting further approves the articles of association16 of the future company. One of the most important tasks of the founders participating in the foundation meeting is to elect the necessary bodies of the company, namely the board of directors and the supervisory board. Until the registration procedure has been completed, the contributions by the share- 19 holders are managed by the founder or a bank, which is specified in the articles of association as approved by the foundation meeting. From a technical legal point of view, the joint stock company comes into existence only 20 after the completion of the registration process with the Commercial Register, or at that moment, in which the company obtains the necessary trade licenses for its business. Before registration the company does not exist. In case someone acts on behalf of the 21 company in the time period between the formal start of the establishment process and its completion, the basic rule is that this person is personally liable for any obligation which results from such action. Nevertheless the shareholders or a competent body of the company may approve the respective action within three months after the registration of the company in the Commercial Register. In this case, an obligation resulting from such activities shall be considered to be binding for the company as of the time the respective action was taken. 14 15 16

Czech ‘‘zakladatelska´ smlouva’’. Section 163, Commercial Code. Czech “stanovy”.

Martin Holler

17

22

Czech Republic

b)

Registration Procedure

II. Joint Stock Company

22 After the necessary acts for the establishment of the company have been completed, namely after a successful foundation meeting, there is a legal obligation to register the company in the Commercial Register. Such application must be submitted to the Commercial Register within 90 days from the foundation of the company or from the moment the company has obtained all trade licenses necessary for conducting its business. The respective application to the Commercial Register must be signed by the members of the board of directors. The application must provide evidence that the founders subscribed the entire registered capital of the future company and have paid any required processing or commission fees agio, and that at least 30 % of the nominal value of all shares have been paid for in money or in kind. The application must further contain the articles of association as approved by the foundation meeting, which have to be consistent with the applicable Czech law. 23 Further documents to be submitted to the Commercial Register are notarial deeds, which provide evidence that foundation meeting took place and approved the articles of association, the respective trade licenses, concessions or other business permissions, as required by the proposed subject of the company, and a declaration of the contribution manager, which states that all contributions have been made in the required manner. In addition, the Commercial Register requires documents which prove that: the company has legal title to the real estate, where it shall have its seat, an affidavit of the members of the board of directors on their capability to perform this function, an extract from the criminal register of each member and a specimen signature for each member. The same documents are also required from all members of the supervisory board. 24 When the registration is approved by the Commercial register, the decision is published in the Business Bulletin.17 Upon publication in this Bulletin, the registration becomes effective vis--vis third parties. c)

Further Approval Requirements

25 Usually, in order to start its business, the company must be in possession of further documents that prove that it has the necessary permissions to conduct its proposed business. In most cases, these are trade licenses. Under the applicable Czech law18 there are several different kinds of trade licenses. The legal entity may acquire and use such trade licences only through a registered responsible person who must be in contractual relationship with the company. In special cases, the trade licenses require special knowledge, professional training or education.

17 18

18

Czech ‘‘obchodnı´ veˇstnı´k’’. Czech Act on Trade Licenses, Act no. 455/1991 Coll., as amended.

Martin Holler

2. Formation of a Joint Stock Company

d)

Czech Republic

26

Shelf Companies

Shelf companies are commonly used on the Czech market because an enterpriser can 26 start its business almost immediately without having to wait for the registration of the company with the Commercial Register. However, the use of a joint stock company as a shelf company is not common because 27 the establishment and any subsequent transfer is a relatively expensive and time-consuming19 procedure. Maintenance of joint stock companies require more time and are comparatively more expensive than the alternative, limited liability companies. Thus almost all shelf companies are companies with limited liability. 20 e)

Costs and Duration

Several documents needed for the establishment and existence of the joint stock com- 28 pany must be in the form of a notarial deed. Consequently, a large proportion of the costs for the establishment of the Company comprise of notary fees. The fees for the formation of a notarial deed are calculated on the basis of the amount of the registered capital (e. g. in case of registered capital in the amount of CZK 2,000,00021 the fee would be cca CZK 12,00022 + VAT). The fee for the verification of the signature amounts to CZK 3023 + VAT. Additional fees for the application to the commercial register must also be taken into 29 account. The lump sum for the registration of a new company is CZK 5,000,24 fees for any change amount to CZK 1,000,25 fees for the deletion of the company amount to CZK 3,000.26 The Commercial Register is obliged to register a newly established company within 30 15 days as of the delivery of the respective application (under the condition that the application is complete). Currently, the Parliament of the Czech Republic passed a new act, which shortens the period to 5 days. Such new act will be effective as of July 1, 2005. However, the actual time needed to set up a joint stock company in the Czech Republic is much longer. This is due to the fact that the registration of the company with the Commercial Register is only the last step in a longer process as described above.

19 20 21 22 23 24 25 26

Compare Section 2 a), 2 b) and 4 b). Czech ‘‘Spolecˇnost s rucˇenı´m omezeny´m – s. r. o.’’. Cca. 70,000 Euro. Cca. 400 Euro. Cca 1 Euro. Cca. 160 Euro. Cca. 30 Euro. Cca. 100 Euro.

Martin Holler

19

31

Czech Republic

f)

Company Stationary

II. Joint Stock Company

31 The stationary to be used by the joint stock company must provide the business name of the company, the registered seat of the company and its identification number as well as an exact specification of its registration with the Commercial Register.

3.

Shareholders

a)

Rights and Obligations of the Shareholders of a Joint Stock Company

32 Both, rights and obligations of the shareholders of a joint stock company under Czech law are rather limited compared to those of the shareholders in a company with limited liability or even more significant compared to the partners in a commercial partnership. Joint stock company shareholders only participate in the capital part of the company. The enterprise part of the company is managed by the board of directors. Consequently, the influence of the shareholders on the operation of the company is basically limited to their participation in the general meeting of the company. aa)

Basic Rights

33 The most important right of the shareholder is of course the shareholder’s right to the annual profit of the company, the dividend. The shareholder’s right to the dividend is calculated as a proportion of the nominal value of the shareholder’s shares of the nominal value of all shares in the company. The respective profit as shown in the balance sheets of the company has to be approved by the general meeting for the distribution to the shareholders. The claim of the shareholder to the dividend becomes due within three months after the respective decision of the general meeting of the company has been adopted. Any other arrangement between the company and a single shareholder is not legally valid. There is also no right of the shareholders to any profit of the company other than the dividend, such open or even hidden profit distributions to shareholders are to be returned to the company. The members of the board of directors of the company are personally liable for the fulfillment of this duty. 34 The shareholders also have a right to any liquidation balance of the company. In case the company is liquidated, such liquidation balance is to be allocated among to the shareholders in the proportion to the nominal value of their shares. 35 As a general rule, the right of the shareholders to participate in the management of the company and their corresponding right to information on the company is limited to their right to participate in the general meeting. Each shareholder is entitled to vote and to make proposals and counter proposals at the general meeting and to require information and explanations regarding the management and business activities of the company. 36 Under certain conditions, the shareholder may also have the right to convene a general meeting of the company. This right is limited to shareholders who own shares whose nominal value exceeds 3% of the total registered capital of the company. In case the 20

Martin Holler

3. Shareholders

Czech Republic

37

amount of the registered capital of the company is less than 100 Million CZK, the nominal value of the shares of the respective shareholder has to exceed 5% of the total registered capital of the company. These shareholders are entitled to require the board of directors to convene a general meeting. In case, the board of directors fails to comply with this obligation within 40 days, a court shall decide that the shareholders are entitled to convene the general meeting themselves and to take all other necessary steps connected therewith. bb) Basic Obligations

The major obligation of the shareholders of a joint stock company is to make their 37 contribution to the registered capital in proportion to the respective issue rate of the shares. Such contribution must be made within the time limit stated in the articles of association of the company, but in any case within one year after the registration of the company. In case the shareholder should be in delay with the fulfillment of this obligation, he is obliged to pay late payment interest on the respective amount as stated in the articles of association, or if not stated in the articles of association, in the amount of 20 % per year. In such case, the board of directors of the company is obliged to inform the shareholder of this fact and to give him an additional period of time to pay the respective amount as stated in the articles of association. In case the shareholder fails to comply with this obligation within this time period or if no time period was specified within 60 days, the board of directors shall exclude the shareholder from the company. Specific obligations of shareholders result from the fact that a single shareholder con- 38 trols a joint stock company. In case a single shareholder acquires shares in the company in such an amount that enables the shareholder to control the company, the shareholder is obliged to make an offer to the other shareholders of the company to takeover their shares. The shareholder is also obliged to inform the company of such facts. The aforementioned obligations also apply to shareholders factually controlling the 39 company by acting in concert. All of the aforementioned obligations only apply in case the shares of the joint stock company are publicly traded. To other joint stock companies it may only apply in case the articles of association of 40 the company explicitly stipulate these obligations. In case the shares of a joint stock company are traded on the stock exchange, the 41 majority shareholder of the company may also be obliged to make the minority shareholders of the company an offer to acquire the shares under certain conditions. This only applies to shareholders who own at least 95% of the voting rights of the company, either solely or together with other shareholders, who may act in concert. The obligation only arises upon a decision by Czech Security Commission27 and only if requested by a minority shareholder of the company.

27

Czech ‘‘Komise pro cenne´ papı´ry’’.

Martin Holler

21

42

Czech Republic

II. Joint Stock Company

42 Another shareholder’s obligation is the information duty. In case any person acquires or exceeds or decreases the portion on the voting rights of the initial issuer of shares seated in the Czech Republic, whose shares are accepted to be negotiable on the official market in the Czech Republic or in another EU member state, by certain limits, an obligation to inform the Securities Commission and the initial issuer in 3 business days arises. If such person fails to comply with this obligation, the legal act is not invalid, but the voting rights connected to the respective shares cannot be performed. b)

General Meeting of the Shareholders

43 The general meeting of the shareholders is the supreme body of a joint stock company. All major decisions, which affect the rights of the shareholders and the company, are to be taken in the general meeting. The right of the shareholder to attend the general meeting is one of the most important rights of the shareholder. The shareholder may attend the general meeting in person or provide someone with a power of attorney to do so in his name. There are annual general meetings and extraordinary general meetings of the company. The annual general meeting has to take place at least once a year as often and in such time as stated in the articles of association of the company. In any case, the annual general meeting must take place at least six months after the end of the accounting year of the company. The general meeting must be convened by the board of directors of the company. Unless the articles of association state otherwise, a quorum needed to take decisions in the general meeting is reached, if shareholders who possess shares whose nominal value exceeds 30 % of the registered capital of the company, are present. aa)

Necessary Majority

44 As a general rule, the general meeting takes decisions by the majority of votes of the present shareholders, whose votes correspond to the ratio of the nominal value of the shares in proportion to the total registered capital of the company. This rule only applies unless the law or the articles of association of the company state otherwise. 45 The applicable Czech law requires a majority of at least 2/3 of the votes of the present shareholders for certain decisions of major importance. In general, these are decisions, which may have major impact on the structure of the company or on the rights of the shareholders. In particular, these are all changes of the articles of association of the company. Also, any increase and decrease of the registered capital of the company requires a 2/3 majority of the vote. The same applies to a capitalization of receivable vis-vis the company. Another example for a major decision of the general meeting, which requires a 2/3 majority of the votes, is the dissolution of the company with liquidation. 46 Decisions, which directly affect the rights of single shareholders, usually require a 3/4 majority of votes of the present shareholders in the general meetings. This applies to proposed changes of the type and form of the shares as well as the change of rights connected with certain types of shares. In addition, decisions, which directly affect the possibilities of the shareholders to sell their shares require a 3/4 majority of the votes, such as restrictions on the transferability of registered shares or the exclusion of the shares from the trade on public markets. Examples for decisions, which would lead to 22

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47

restrictions of the rights of certain shareholders to acquire new shares, are the exclusion or restriction of the priority right to gain convertibles and priority bonds or priority rights to subscribe new shares in the company. These decisions also require a 3/4 majority of the votes. A third group of decisions, which require a 3/4 majority of the votes in the general meeting consists of measures, which have a direct impact on the profit of the company or its control by third parties, such as the approval of a control agreement or an agreement on the transfer of profit of the company or an increase of the registered capital of the company by non-monetary contributions. There are also decisions, which require the consent of all shareholders, whose rights are 47 affected by a certain decision. The most important example for this is a decision on assembling of shares. In this case, all shareholders, whose shares are to be assembled, have to declare their consent with this decision. bb) Restriction on Shareholders’ Rights to vote

All shareholders are entitled to vote and take decisions in the general meeting. Never- 48 theless, there are certain restrictions on shareholders to perform their voting rights. For instance a shareholder, whose voting right is connected with an interim certificate may not perform his voting right in case he is in delay with payment of the issue rate. In general, a shareholder shall not perform his voting right, if the general meeting is to 49 decide directly over his rights. The most important examples for this are a decision of the general meeting on non-monetary contributions of shareholders or the granting of advantages or the waiver of certain obligations of a shareholder vis--vis the company. It also applies in case the general meeting shall decide on the recall of a shareholder from his function as a member of the company’s board of directors or the supervisory board, due to a breach of his obligations. The shareholder may further not perform his voting right in case the shareholder is in breach with his obligation to make a mandatory offer for takeover of other shareholders shares or if he breached his information duty. The shareholder shall not be obliged to follow any suggestions or proposal by the 50 company or the board of directors. Consequently, the agreements, in which the shareholder commits himself to follow orders of the company, the board of directors or the supervisory board when voting in the general meeting are invalid under Czech law. The same applies to agreements, under which the shareholder shall be obliged to perform his voting right in a specific way or not at all, if he shall receive a consideration from the company for this. The aforementioned restrictions on the performance of the voting rights by shareholders are also invalid, in case they are incorporated in the articles of association. As mentioned earlier, all decisions, which may have a substantial impact on the struc- 51 ture of the company or the framework of its business, are to be taken by the general meeting. In particular this applies to all changes of the articles of association of the company. Another very important example of decisions, which are necessarily to be taken by the general meeting are increases or decreases of the registered capital of the company, including the authorization of the board of directors of the company to

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Czech Republic

II. Joint Stock Company

increase the registered capital or the possibility of capitalization of monetary receivables or the issuance of bonds. 52 The general meeting may further appoint and recall the members of the other two statutory organs of the company, the board of directors and the supervisory board. With regard to the members of the board of directors, the articles of association of the company may stipulate that the members may also be appointed and recalled by the supervisory board. 53 The general meeting also approves the ordinary and extraordinary financial statements and consolidated financial statements of the company. One of the most important decisions, which has to be taken by the general meeting, is the allocation of the profit and the profit distribution including a reimbursement for possible loss and the determination of annual royalties. 54 The general meeting further decides on the remuneration of the members of the board of directors and the supervisory board. It also decides on the registration of subscribers’ securities of the company and the cancellation of such. The dissolution of the company requires a decision by the general meeting, which also appoints and recalls a liquidator and decides on his remuneration and approves any proposal on the allocation of a possible liquidation balance. 55 Any major decisions, which change the structure of the company, also fall within the competence of the general meeting, such as mergers with other companies and a possible transfer of all assets to one shareholder, as well as decisions on the division of the company or the change of its legal form. It shall also decide on the conclusion of an agreement on the transfer of all assets or the enterprise of the company or any part thereof. The same applies to the same type of agreements, which are to be concluded by a legal entity controlled by the company. 56 The general meeting may approve legal acts, which were made on behalf of the company before its establishment. The general meeting also has to approve control agreements, agreements on the transfer of profit and agreements on a silent partnership. It shall also approve any amendments to the aforementioned agreements. 57 On the other hand, the general meeting may not take any decisions on matters, which do not fall within its competence by order of law or as stipulated in the articles of association. cc) The Course of the General Meeting

58 First, the general meeting elects its chairman, a recording clerk, two verifiers of the minutes of the meeting and a person responsible for counting the votes. The course of the general meeting is recorded in the minutes of the general meeting. These minutes must necessarily include the business name and seat of the company, place and time of the general meeting, the names of the chairman, the recording clerk, the verifiers of the minutes and the person responsible for counting the votes. They describe the proceedings of the respective items of the agenda, the decisions and any results of the voting. 24

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59

Any objections to the minutes of the meeting have to be made within 30 days after the general meeting took place. The minutes must be signed by the chairman of the general meeting and the verifiers. They are to be filed with the company for the whole duration of the company. dd) Challenge of Decisions of the General Meeting

Decisions, which were taken by the general meeting may be challenged by each share- 59 holder, members of the board of directors, a liquidator of the company and an administrator of bankruptcy assets as well as members of the supervisory board of the company. The aforementioned may challenge the validity of the decisions at the court. Such request must be based on the fact that the respective decision is in conflict with the applicable Czech law or the articles of association. Any right to challenge decisions by the general meeting must be exercised within 3 months as of the day when the general meeting took place. In case the general meeting was not convened ordinarily, the applicant must challenge this at the court within 3 months as of the day when he first learned about the fact, that the general meeting took place. In any case, the validity of decisions taken by the general meeting must be challenged within one year as of the day when the general meeting took place. The competent court may not rule that the respective decision is invalid, if the decision was indeed in breach of the respective law or the articles of association, but consequently only led to a non-material breach of the applicant’s rights without major legal impact. The court may also not decide on the invalidity of the merger, a transfer of assets, a division of the company or the change of its legal form, if it has been validly registered with the Commercial Register. In case, the company has only a sole shareholder, a general meeting does not take place. 60 All decisions, which fall within the competence of the general meeting are taken by the sole shareholder instead. c)

The Shares of a Joint Stock Company

Each share of a joint stock company represents a part of the registered capital of the 61 company. As securities the shares also represent certain rights and obligations of a shareholder. Under Czech law these rights of the shareholders may basically not be separated from the securities themselves. The applicable law states only a limited number of rights, which may be transferred separately from the securities. These rights are in particular rights to the payment of the dividend or the liquidation balance. A shareholder may also separately transfer his priority right to subscribe new shares or to gain convertible and priority bonds. d)

Classes of Shares

aa)

Outlay of the Shares

The shares may either be represented by a share certificate and be issued in physical 62 form28 or in immaterial form.29 Immaterial in this context means that the shares are not 28 29

Czech ‘‘listinna´ akcie’’. Czech ‘‘zaknihovana´ akcie’’.

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Czech Republic

II. Joint Stock Company

represented in the form of share certificates but are registered with the Securities Center30 and only exist in electronic form. 63 The share certificate must necessarily contain the business name and the seat of the company, the date of the issue of the share, the nominal value of the share and its form, the amount of the registered capital and the number of shares as of the issue date. In case of registered shares, the shares certificate must also provide the business name or the name of the shareholder. bb) Form of Shares

64 Czech law further distinguishes between registered shares31 and bearer shares. 32 Share certificates of registered shares also provide the name of the bearer, while bearer shares may be transferred by a simple handover of the respective share certificates. This difference in the transferability of the shares may be deemed as the major difference between those two types of shares. cc) Type of Shares

65 Under Czech law, there are also three different types of shares: common shares,33 priority shares34 and employee shares. 35 Priority shares include the priority right to the dividend or a liquidation balance. In contrast, sometimes they must not grant the shareholder a right to vote in the general meeting. The total of the nominal value of all priority shares of a company may not exceed one half of the registered capital of the company. Employee shares appear still in Czech companies, however the issuance of such shares is not legally possible anymore. A special type of shares is the so-called “Golden Share”, which exists in companies founded by the Fund of the National Assets36 or the Land Fund.37 If these funds own shares in a company, which was founded by them, the “Golden Share” represents the special right to veto any decision of the general meeting. This right pertains only to the Fund of the National Assets or respectively the Land Fund. It does not pass on to any future owner of shares in the company. dd) Collective Shares

66 Instead of a large number of individual shares certificates, the respective shares may also be represented by collective share certificates. Such collective share certificates represent a certain number of individual share certificates, as stated on the share certificate.

30 31 32 33 34 35 36 37

26

Czech Czech Czech Czech Czech Czech Czech Czech

‘‘Strˇedisko cenny´ch papı´ru˚’’. ‘‘akcie na jme´no’’. ‘‘akcie na majitele’’. ‘‘kmenove´ akcie’’. ‘‘prioritnı´ akcie’’. ‘‘zameˇstnanecke´ akcie’’. ‘‘Fond na´rodnı´ho majetku’’. ‘‘Pozemkovy´ fond’’.

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3. Shareholders

e)

Czech Republic

67

Transfer of Shares

There are different legal requirements for the transfer of shares, which vary with regard 67 to the form and type of the share. A share certificate in material form is transferred by handover of the document. If the 68 share is a registered share, the transfer further requires an endorsement on the share certificate. The transfer becomes effective vis--vis the company as of registration in the respective list of shareholders, which is held by the company. Non-material bearer shares and registered shares are transferred at the moment of their 69 registration with the respective account of the new account holder with the Securities Center. Again, the transfer of registered shares needs to be registered with the company. The transferability of bearer shares may not be restricted by the articles of association or 70 the general meeting. In contrast, the transferability of registered shares may be restricted by the articles of association of the company. In any case a transferability may not be completely excluded. f)

Acquisition of Own Shares by the Company

As a general rule, the company may not subscribe its own shares. A joint stock company 71 under Czech law may only acquire its own shares if the general meeting of the company decides to acquire shares of the company. This condition may only be waived in case substantial damage threatens the company. In any case the nominal value of these shares may not exceed 10 % of the registered capital of the company. The company has to have sufficient resources to establish a respective special reserve fund. The shares must be alienated by the company within 18 months. The company may also acquire its own shares for the purpose of their further sale to the employees of the company. Such shares must be alienated within 12 months. The company may acquire its own shares without fulfillment of the aforementioned 72 conditions only in case the company acquires the shares for the purpose of decrease of the registered capital of the company or if is the legal successor of the previous owner of the shares. Under these conditions may the company also acquire its own shares in order to fulfill the legal obligations or judicial decisions or in a public auction when execution the judicial decision against the owner of the shares. In the aforementioned cases the respective shares must be alienate within 3 years. The company may also acquire its own shares if it does not have to compensate the formal owner of the shares for the acquisition. These shares must be alienated by the company within 18 months after their acquisition. Should the company fail to comply with the obligation to alienate the shares within the 73 aforementioned time periods, the company is obliged to decrease its registered capital by the nominal value of the respective shares. In case the company does not comply with this obligation, a court may decide on dissolution and liquidation of the company.

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74

Czech Republic

II. Joint Stock Company

74 For the time period, in which the company possesses its own shares, the voting rights connected with the shares cannot be performed. g)

Other Securities Issued by a Joint Stock Company

75 Besides its shares a joint stock company may also issue several other securities. One of them is dividend coupon which represents the right of the bearer to the dividend. This security must necessarily be issued in material form; it will not be registered, but is a bearer security. 76 The right to the priority subscription of shares of the company may be represented in the form of a warrant. A warrant must necessarily be a bearer security; it can be issued in both, in documentary and book form. The same right may also be represented by priority bonds. In contrast, convertible bonds represent the rights of the bearer to exchange these bonds for the shares of the company. In case the subscriber of shares has not paid off the whole issue rate of the share before the registration of the company into the Commercial Register, the company shall issue an interim certificate. These certificates represent the corresponding subscribed, but not yet paid, shares of the company.

4.

The Articles of Association

77 The articles of association of a joint stock company constitute the major legal framework for the structure of the company. They govern the relations between the shareholders, the board of directors and the supervisory board as well as the major characteristics of the company and its shares. a)

Mandatory Content

78 Under Czech law, the articles of association of a joint stock company must state the name, under which the company shall conduct its business. They shall also provide the seat of the company and the subject of the company’s business. The articles of association also have to describe the registered capital of the company and its shares. Beside the exact amount of the registered capital, the method of repayment of the issue rate also has to be stated. Concerning the shares of the company, the articles of association must stipulate the number and the nominal value of the shares and their form. In addition, the articles of association also have to stipulate, how many of the company shares are registered and how many are bearer shares. 79 The number of votes connected to each share and the respective voting procedure for the general meeting of the company also has to be provided. In case the shares issued by the company have different nominal values, the articles of association also have to state the number of votes connected to the respective nominal value of the share. 80 The articles of association also necessarily have to further describe the regulations concerning the general meeting of the company. In particular the procedure, how to 28

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81

convene the general meeting has to be provided, as well as the competence of the general meeting and the procedure of its decision-making. Mandatory content of the articles of association of a joint stock company is also the 81 number of the members of the board of directors of the company as well as the number of the members of the supervisory board. They should also specify the term of the function of the members of both company’s bodies. In addition, the articles of association shall determine the competence of the board of directors and the supervisory board and the method of their decision-making. The method and the creation of the reserve fund of the company and its amount also 82 have to be specified in the articles of association. They shall describe the method of allocation of the profit and loss of the company as well as the rules governing the increase and decrease of the registered capital of the company. Further, the articles of association must describe the consequences of the breach of the shareholder’s obligation to pay off his subscribed shares. They shall also determine the procedure concerning any change or amendment of the articles of association. b)

Optional Provisions

In addition to the mandatory content, the articles of association may stipulate a large 83 variety of optional provisions. The Czech Commercial Code in numerous cases enables the parties to chose from different possibilities to regulate the relations between shareholders and the company under the condition that such case is expressly stipulated by the articles of association. The Commercial Code namely mentions the procedure of issuance of different types of shares, their identification, number and rights connected to them. The articles may also state the rules governing the issuance of the bonds and their rights or the rules governing the favored acquisition of shares by the employees of the company. c)

Change of the Articles of Association

The articles of association may be changed only by decision of the general meeting, 84 which procedure corresponds to the importance of this document. Every time the articles of association are changed the board of directors is obliged to restate the full new wording of the articles. Every amendment of the articles of association requires registration into the commercial 85 register. This requirement does not necessarily mean that changes always become effective as of registration. Only certain changes become effective as of registration into the commercial register, such as the increase or decrease of the registered capital, changes of the form or type of the shares or the restriction of transferability of the shares. In contrast, some changes require for their effectiveness only the decision of the general meeting, or may even be effective later if this is stated by such decision. Any change to the articles of association must necessarily be made in the form of a 86 notarial deed. Martin Holler

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87

Czech Republic

d)

Increase and Decrease of the Registered Capital of the Joint Stock Company

aa)

Increase of the Registered Capital

II. Joint Stock Company

87 An increase of the registered capital of a joint stock company may be decided only by the general meeting. 88 There are basically two possibilities how to increase the registered capital. It may be realized by the subscription of new shares or from the company’s own sources. 89 The new shares may be subscribed by monetary contributions of the subscriber. In such case the shareholder is obliged to pay the part of the nominal value of the shares which is determined by the general meeting, which must be in any case at least 30 % plus the possible emission agio. Should this condition not be fulfilled, the subscription is ineffective. 90 New shares may be subscribed also by non-monetary contributions, but only under the condition that such procedure should serve an important interest of the company. A contribution in kind must be approved by the general meeting and in contrary to the monetary contribution must be fully made before the application to the commercial register is submitted. 91 Each shareholder of a joint stock company has a special priority right to subscribe the new shares. Such right corresponds to his portion on the registered capital of the company. This right cannot be validly restricted or excluded by the articles of association. However, the decision of the general meeting on the increase of the registered capital may restrict or exclude this right if it is in the interest of the company. The restriction or exclusion must apply to all shareholders to the same extent. 92 Without undue delay after the subscription of shares corresponding to the intended increase and payment of at least 30 % of their nominal value (including possible emission agio) or after the contribution in kind has been made, the board of directors is obliged to submit to the commercial register an application for registration. The increase becomes effective as of the registration with the Commercial Register. 93 The second way to increase the registered capital is from own sources of the company. Such increase is made from the net profit of the company or other sources as stated in the financial statement of the company. In this case the increase is shared by all shareholders in the proportion of the nominal value of their shares. 94 An increase of the registered capital from own sources may either be in the form of the issuance of new shares and their allocation among the shareholders free of charge or may be realized by the increase of the nominal value of the existing shares. 95 In certain cases and under special conditions the general meeting may authorize the board of directors to decide on the increase of the registered capital. This procedure is possible only in case the proposed increase of the registered capital does not exceed one third of the existing registered capital. 30

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96

bb) Decrease of the Registered Capital

The decrease of the registered capital is decided, as well as the increase, by the general 96 meeting. The basic rule governing this procedure is that the registered capital may never decrease under the limit stated by the law, i. e. in this case under CZK 2,000,000 (or CZK 20,000,000 as the case may be38). A decrease of the registered capital may have a major impact on the position of the 97 company’s creditors. Consequently, the Czech Commercial Code includes several provisions protecting the creditors. As a general rule, the company must always ensure that the recoverability of the receivables of the company’s creditors shall not worsen by such decrease. With regard to this, the board of directors is obliged within 30 days from the effectiveness of the decision on the decrease of the registered capital to inform third parties and all known company’s creditors of this fact. The creditors are thereafter within 90 days from such notification entitled to require additional security for their non-paid receivables, which have not been due at the time of delivery of the notification. The decrease of the registered capital can be realized by the decrease of the nominal 98 value of the shares, which must be made proportional in all shares of the company. The other possibility to decrease the registered capital is to withdraw shares from circulation or to abandon the issuance of the shares in case the subscribers are in delay with payment of their respective nominal value.

5.

The Board of Directors39

a)

Members of the Board of Directors

The board of directors consists of at least 3 members. This rule does not apply in case 99 the company only has a sole shareholder. The members are appointed and recalled by the general meeting. Alternatively, the 100 articles of association may stipulate that appointment and recall shall be made by the supervisory board. The length of a single form of the members of the board of directors is determined by the articles of association and may be a maximum of 5 years. The relationship between a single member of the board of directors and the company is 101 governed by a so-called “agreement on performance of function”.40 Such agreement requires written form and must be approved by the general meeting. In case such agreement is not concluded the relationship between the member and the company shall be governed by the legal provisions regarding the mandate agreement. 41

38 39 40 41

Compare Section 1 a). §§ 191 of the Commercial Code. § 66 section 2 of the Commercial Code – ‘‘smlouva o vy´konu funkce’’. §§ 566 of the Commercial Code.

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102

Czech Republic

II. Joint Stock Company

102 Each member of the board of directors must comply with the following conditions: – must be at least 18 years old; – must be fully capable to make legal acts; – is irreproachable in the meaning of the Act on Trade Licenses; – there is no obstacle as defined in the Act on Trade Licenses; – must not conduct business in the same or similar field of business as the company; – must not conduct business in another company as an unlimited partner or as a controlling person of another person with the same or similar subject of business; – must not perform the function of a statutory body in a company with the same or similar subject of business, this does not apply to related companies. 103 A member of the board of directors may also be a foreigner. For this purposes a resident permit is required. This rule does not apply to citizens of the European Union. b)

Management and Representation

104 The board of directors is a statutory body of the company. It is the supreme management part of the company and entitled to decide on all issues concerning the company, unless the law or the articles of association expressly reserve the respective rights to other bodies of the company. 105 Unless stipulated otherwise in the articles of association, each member of the board of directors is entitled to act on behalf of the company independently. Such right to act on behalf of the company may be restricted by either the articles of association, a decision of the general meeting or the supervisory board. However, such restriction is not effective towards third parties. In any case the members and the manner how they act on behalf of the company must be registered in the commercial register. Basically, the board of directors is obliged to observe the rules and instructions approved by the general meeting. 106 The board of directors is responsible for the management of the company. At least once in an accounting period or in a time stated by the articles of association the board of directors has to submit to the supervisory board a report on the major business activities of the company and the state of the company’s assets. 107 The members of the board of directors are obliged to act with the care of a prudent businessman and to keep all confidential information secret. Should a member cause any damage to the company, he shall be liable for such damage. Any agreement, which would exclude or restrict his liability in this respect, is invalid.

32

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6. Supervisory Board

6.

Supervisory Board42

a)

Members of the Supervisory Board

Czech Republic

108

The supervisory board of a joint stock company must have at least three members, the 108 number of members must always be divisible by three. In case the company has more than fifty employees, two third of the members of supervisory board are appointed by the general meeting and one third is elected by employees. The members appointed by the employees may also be recalled only by employees. In case the company has less than fifty employees the general meeting the right to elect and dismiss all members of the supervisory board.

the 109 the the has

The functional period of the members is stated by the articles of association. However, a 110 single term cannot exceed five years. The first functional period of the supervisory board after establishment of the company is always one year. The members of the supervisory board must comply with the same conditions as the 111 members of the board of directors.43 The member of the supervisory board further may not simultaneously perform the function of the member of the board of directors, a proxy or a person entitled to act on behalf of the company according to the commercial register. b)

Competence

The main objective of the supervisory board is to oversee the performance of the board 112 of directors and the business activity of the company. In order to perform this function, the supervisory board is entitled to inspect all documents concerning the activity of the company and control if the accounting is kept in accordance with law and real state of the company. One of the most important functions of the supervisory board is to review the ordinary, 113 extraordinary and consolidated financial statements of the company as well as the interlocutory financial statements and proposals on allocation of profit or loss. The supervisory board is entitled to convene the general meeting. The members of the 114 supervisory board attend the general meeting and are obliged to acquaint the general meeting with the results of their control activity. The articles of association of the company may also stipulate that the supervisory board 115 shall be entitled to elect and dismiss the members of the board of directors. The decisions of the supervisory board are adopted by a simple majority of votes unless 116 the articles of association state otherwise. 42 43

§ 197 of the Commercial Code. Compare Section 6 a).

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117

Czech Republic

II. Joint Stock Company

117 Some decisions by the board of directors require the prior approval of the supervisory board. In the event such approval is not granted and consequently the company suffers any damage, then the members of the board of directors are not responsible for such damage and responsibility passes to the members of the supervisory board under the condition that the members of the supervisory board did not act with the care of a proper manager. On the other hand, should the damage be caused due to the fact that the supervisory board approved such activity, then the members of the board of directors and the supervisory board shall be jointly and severally liable for such damage if they did not act with the care of a proper manager.

7.

Selected Capitalization and Liability Questions

a)

Capitalization of the Receivable

118 Capitalization of receivables under Czech law is considered to be a non-monetary contribution to the registered capital of a company in the form of an off-set of the respective claim of the shareholder vis--vis the company. 119 According to the applicable Czech law44 this capitalization is not possible except when expressly permitted by special regulation in the law. These exceptions relate mainly to the increase of the registered capital but not to the establishment of a new company. 120 One of the exceptions is the set off of the receivable against the non-paid part of the contribution of a shareholder under the condition that this procedure was prior approved by the general meeting during the process of the increase of the registered capital. 121 The other possibility how to capitalize a receivable is to off-set it against the non-paid part of the issue rate.45 Again, this must be approved by the general meeting as part of the increase of the registered capital. b)

Liabilities of the Joint Stock Company

122 In general the joint stock company is a legal entity and thus is fully liable for its actions with all its assets. In contrary to other forms of companies in the Czech Republic the shareholders of a joint stock company do not guarantee the obligations of the company during its existence. c)

Special Relations Between the Company and the Members of Its Bodies

123 The possible abuse of the close relations between the company and single members of its board of directors or its management board or related persons require special provisions regarding possible advantages in favor of such persons. 44 45

34

§ 59 section 8 of the Commercial Code. § 163 section 3 of the Commercial Code.

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8. Accounting

Czech Republic

124

Any payment in favor of a member of any body of the company, to which this person is 124 not entitled according to the law, internal rule or an agreement on performance of the function, may be granted only with the approval of the general meeting. The granting of loans to members of the board of directors or the supervisory board is 125 also subject to certain restrictions. A loan agreement or any agreement securing the loan concluded with a member of the board of directors, supervisory board, proxy or other person entitled to conclude such agreement on behalf of the company or with persons closely related to them or any transfer of the property free of charge may be realized only upon prior approval of the general meeting. The respective agreements may only be concluded under conditions usual in normal business relations.

8.

Accounting

a)

Financial Statements

The joint stock company is obliged to maintain proper bookkeeping in accordance with 126 Czech accounting standards. In the frame of this obligation the company is above all obliged to issue all financial statements and the annual report. The business year of the company must be the calendar year. The financial statement contains the balance sheet, a report on profit and loss and 127 annexes evidencing this. It may also contain a summary of cash flow or a summary of the change of the core capital. The Commercial Code distinguishes the ordinary financial statement which is made 128 regularly as of the last day of the accounting year and the extraordinary financial statement required for special events. The company is also obliged to issue an annual report describing the development and 129 the business state of the company. Further conditions are stated in the Accounting Act.46 b)

130

Audit Requirements

According to the Accounting Act a joint stock company must under certain conditions 131 have its financial statement and the annual report verified by a registered auditor. This is required if the active capital of the company exceeds CZK 40,000,000 or the turnover of the company exceeds CZK 80,000,000 or if the average number of the company’s employees exceeds 50.

46

Act no. 563/1991 Coll., on Accounting, as amended.

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132

Czech Republic

c)

Reserves

II. Joint Stock Company

132 A joint stock company is obliged to create a reserve fund in the time and in the amount stated in its articles of association.47 The reserve fund is created from the net profit as shown in the ordinary financial statement for the year when the company first generated net profit. The amount allocated to the reserve fund has to be at least 20 % of the net profit but not more than 10 % of the value of the registered capital. 133 The reserve fund is annually replenished by the sum as stated in the articles of association, which shall equal at least 5% of the net profit. The reserve fund is filled up to the amount stated by the articles of association, but in any case up to at least 20 % of the registered capital. 134 The reserve fund up to the amount of 20 % of the registered capital may be used only for a possible reimbursement of any loss. The disposition with the reserve fund pertains to the board of directors.

9.

Taxation

135 Several taxes are applicable for joint stock companies in the Czech Republic. a)

Corporate Income Tax48

136 The income tax for legal entities under Czech law amounts to 26%. 49 The law recognizes several exceptions when lower rates are applicable (5% or 15%). b)

Value Added Tax50

137 The rate of the value added tax in the Czech Republic amounts to 19%, a special decreased rate of 5% is used in certain cases. c)

Other Taxes

138 Other taxes such as consumption tax, real estate tax, real estate transfer tax and others may be applicable.

10. Termination of the Business 139 The precise moment when a company ceases to exist is its deletion from the commercial register. Before this the company must be dissoluted either with or without liquidation. 47 48 49 50

36

§ 217 of the Commercial Code. Act no. 586/1992 Coll., on Income Tax, as amended. 24% as of 1. January 2006. Act no. 235/2004 Coll., on Value Added Tax, as amended.

Martin Holler

10. Termination of the Business

Czech Republic

140

The dissolution of the company without liquidation is possible only in case the rights and obligations of the dissolution company pass to another entity. a)

Dissolution of the Company51

The company is automatically dissoluted by expiration of the time for which it was 140 established or by the achievement of the purpose for which it was founded. The dissolution may only be decided by the shareholders or the respective body of the company. Further the company may be dissoluted by the decision of a state authority, i. e. on the day stated in the respective court decision or by the termination of the bankruptcy proceedings or by the rejection of a bankruptcy petition due to a lack of assets. The court decision mentioned above may dissolute the company only in special cases 141 defined by law. It applies, if the general meeting of the company did not take place within the last two years or if the respective bodies of the company have not been appointed in the last year or the company has not conducted any business for a period longer than two years. Another special case is that the company loses its business licenses or in case the legal requirements for the establishment of the company perished. The dissolution may come into account also in case the company breached its obligation to create the reserve fund or failed to comply with an obligation to sell the enterprise as imposed by the Antimonopoly Office.52 b)

Liquidation of the Company

The company enters into the liquidation phase as of the day of its dissolution. Such fact 142 must be registered in the commercial register and the company has to use the attachment “in liquidation” in connection with its business name. As soon as the company enters into liquidation a liquidator must be appointed by general meeting. In case the dissolution of the company was imposed by a court, liquidator is appointed by such court. Once appointed, the liquidator assumes competence (including responsibilities) of the statutory body to act on behalf of company.

the 143 the the the

The liquidator is obliged to make all necessary steps to settle the rights and obligations 144 of the company. In order to comply with this obligation the liquidator shall inform all known creditors of the company and prepare a liquidation financial statement of the company including a list of its assets. After the liquidator has made all necessary steps he issues a liquidation report and makes a proposal for the allocation of the liquidation balance among the shareholders. The liquidation terminates by the allocation of the liquidation profit or by the satisfac- 145 tion of the creditors from the proceeds from the sale of the company’s assets.

51 52

§ 68 of the Commercial Code. Czech ‘‘U´rˇad na ochranu hospoda´rˇske´ souteˇzˇe’’.

Martin Holler

37

146

Czech Republic

III. Limited Liability Company

146 Within a period of 30 days after the termination of the liquidation the liquidator is obliged to file an application for deletion of the company from the commercial register.

11. Insolvency 147 The legal rules concerning insolvency are stated in the Bankruptcy Act.53 This act distinguishes two situations when the company may be considered insolvent. First, the company is considered to be insolvent when it has several creditors and is not capable for a longer period to fulfill its due obligations. Second, the company is considered to be insolvent in case it has several creditors and its due obligations exceed its assets. 148 In the event the company is in a situation as described above its statutory body is obliged to file a bankruptcy petition without undue delay. Should the statutory body, i. e. in this case the board of directors, fail to comply with this obligation, its members shall be personally liable to the creditors of the company for the damage caused by this breach. 149 At the moment bankruptcy is declared, a bankruptcy trustee is appointed. The bankruptcy trustee is then entitled to dispose of the company’s assets. All legal acts made by the company itself (i. e. its bodies) are invalid towards the creditors.

12. Choice of Seat Outside the Czech Republic 150 The company may move its seat both from or to the Czech Republic under conditions stated by the Commercial Code.54 The main condition is that this procedure is permissible under an applicable international agreement, the laws of the European Union or a special legal rule. 151 The change of seat is effective as of the registration with the commercial register.

III. Limited Liability Company 1.

Basic Characteristics of a Limited Liability Company

152 In short, a limited liability company under Czech law55 may be described as a capital based company with a certain registered capital, which is made up of the contributions of the shareholders. The basic principles of a limited liability company are the following:

53 54 55

38

Act no. 328/1991 Coll., on Bankruptcy Proceedings, as amended. § 26 of the Commercial Code. Czech ‘‘spolecˇnost s rucˇenı´m omezeny´m’’, short ‘‘s. r. o.’’

Martin Holler

1. Basic Characteristics of a Limited Liability Company

Czech Republic

153

– the obligation of the shareholders to make a contribution to the registered capital of the company; – the obligation of the company to have a certain registered capital; – the participation in the management of the company by the shareholders is not performed solely through certain bodies of the company, often the shareholders themselves manage the company; – the shareholders are liable for the obligations of the company unless the payment of the contributions was registered in the Commercial Register. a)

Basic Structure of a Limited Liability Company

A limited liability company is typically characterized by three bodies. The business 153 activities of the company are managed by the managing director(s),56 who represent the company vis--vis third parties. The shareholders perform their rights in the shareholders’ meeting57 of the company and the control authorization pertains to the supervisory board.58 In contrast to the joint stock company the establishment of the supervisory board is not mandatory. b)

Number of Shareholders

A limited liability company may be founded by a single shareholder, both a person or a 154 legal entity. However, a limited liability company with a sole shareholder cannot be a single founder or single shareholder of another limited liability company. Further, one person may become a single shareholder of a maximum of three limited liability companies. The maximum number of shareholders permitted by Czech law is fifty. c)

155

Registered Capital

The minimum amount of the registered capital of a limited liability company is CZK 156 200,000.59 However, with regard to the fact that such limit exclusively applies to companies founded after 31. 12. 2000, many existing companies still have a registered capital in the amount of CZK 100,000,60 which was the limit until the end of the year 2000.

56 57 58 59 60

Czech ‘‘jednatel(e´)’’. Czech ‘‘valna´ hromada’’. Czech ‘‘dozorcˇı´ rada’’. Cca. 7,000 Euro. Cca. 3,500 Euro.

Martin Holler

39

157

Czech Republic

d)

Significance of the Limited Liability Company in Czech Business Life

III. Limited Liability Company

157 The limited liability company is the most common form used by enterprises on the Czech market. The total number of companies with limited liability in the Czech Republic amounted as of September 30, 2004 to 216,897,61 which corresponds to 90 % of the total number of companies in the Czech Republic.

2.

Formation of a Limited Liability Company

a)

Formation Procedure

158 The formation of a limited liability company under Czech law may be divided into two major parts. First the establishment by the shareholders and second the registration in the Commercial Register. 159 The company is established by a shareholders’ agreement signed by all future shareholders. The shareholders’ agreement of a limited liability company must contain officially verified signatures of the founders and must be adopted in the form of a notarial deed. In case the company is founded by a single person or entity only, the shareholders’ agreement is replaced by the so called deed of foundation.62 160 At the time of establishment of the company the shareholders’ agreement must include a catalogue of specifications, namely the business name under which the future company shall operate, the seat of the company, the identification data of the shareholders, its subject of business, the amount of the registered capital and the amount of each shareholder’s contribution, the manner and the time for payment of the shareholders’ contributions, the names of the first managing director(s) of the company and the manner in which they shall act on behalf of the company, names of the first members of the supervisory board if applicable and the name of the person who shall administer the contributions to the registered capital. 161 The shareholders’ agreement may also state that the company shall issue articles of association63 which in detail determine further internal matters of the company. 162 The shareholders then make their contributions to the registered capital of the company. Such contributions may either be monetary or in kind. 163 Until the registration procedure has been completed, the contributions by the shareholders are managed by the founder or the bank that is specified in the shareholders’ agreement.

61 62 63

40

Czech Statistical Office, Organizational statistics, Tab. no. 1, 01n2-04. Czech ‘‘zakladatelska´ listina’’. Czech ‘‘stanovy’’.

Martin Holler

2. Formation of a Limited Liability Company

Czech Republic

164

From a technical legal point of view, the limited liability company comes into existence 164 only after the completion of the registration process with the Commercial Register, or at such moment, when the company obtains the necessary trade licenses for its business. Before that the company does not exist. In case someone acts on behalf of the company 165 in the time period between the formal start of the establishment process and its completion, the basic rule is that this person is personally liable for any obligation that results from such action. Nevertheless, the shareholders or a competent body of the company may approve the respective action within three months after the registration of the company in the Commercial Register. In this case, an obligation resulting from such activities shall be considered to be binding for the company as of the time in which the respective person has acted. b)

Registration Procedure

After the necessary acts for the establishment of the company have been completed, 166 there is a legal obligation to register the company in the Commercial Register. Such application must be submitted to the Commercial Register within 90 days from the foundation of the company or from the moment the company has obtained all trade licenses necessary for conducting its business. The respective application to the Commercial Register must be signed by the managing director(s). The application must prove that the founders have paid the whole full premium and at least 30 % of each monetary contribution. The application must further contain the shareholders’ agreement or the deed of foundation, which have to be consistent with the applicable Czech law. Further documents to be submitted to the Commercial Register are the articles of 167 association as the case may be, the respective trade licenses, concessions or other business permissions as required by the proposed purpose of the company, a declaration of the contribution manager which states that all contributions have been made in the required manner and a confirmation of the bank that on a special account an amount corresponding to the already paid contributions was deposited. In addition, the Commercial Register requires documents that prove that the company has legal title to the real estate where it shall have its seat (or a valid lease agreement) and an affidavit of the managing director(s) on their capability to perform their function, an extract from the criminal register of each managing director and his specimen signature. The same documents are also required from all members of the supervisory board, if applicable. In case the registration is approved by the Commercial Register, this decision is pub- 168 lished in the Business Bulletin.64 Upon publication in this Bulletin, the registration becomes effective vis--vis third parties.

64

Czech ‘‘obchodnı´ veˇstnı´k’’.

Martin Holler

41

169

Czech Republic

c)

Further Approval Requirements

III. Limited Liability Company

169 Usually, in order to start its business, the company must be in possession of further documents that prove that it has the necessary permissions to conduct its proposed business. In most cases, these are trade licenses. Under the applicable Czech law65 there are numerous different kinds of trade licenses. Such trade licenses may be operated by the legal entity only through the responsible person who must be in a contractual relationship with the company. In special cases, the trade licenses require special knowledge, professional training or education. In respect to limited liability companies, it is preferable that the function of the responsible person is performed by the managing director(s) of the company. d)

Shelf Companies

170 Shelf companies are commonly used on the Czech market. The main reason for this is that an entrepreneur can start its business almost immediately upon the agreement of transfer of ownership interest in such company without having to wait for the registration of the company with the Commercial Register. 171 A limited liability company is very suitable and generally used for these purposes, because the ownership interest in the company may be transferred by a simple contract and the transfer is effective upon the signing of such contract which does not require the form of a notarial deed, only officially verified signatures are needed.66 Also the change of a managing director is very simple and effective upon the signature of the resolution of the general meeting of shareholders or a single shareholder as the case may be.67 Subsequent registration of these changes in the Commercial Register is just a formal step. e)

Costs and Duration

172 Numerous documents needed for the establishment and maintenance of a limited liability company have to be in the form of a notarial deed. Consequently, a large proportion of the costs for the establishment of the company comprises of notary fees. The fees for the formation of a notarial deed are calculated on the basis of the amount of the registered capital (e. g. in case of registered capital in the amount of CZK 200,00068 the fee would be approximately CZK 2,300 69 + VAT). The fee for the verification of the signature amounts to CZK 30 70 + VAT.

65 66 67 68 69 70

42

Czech Act on Trade Licenses, Act no. 455/1991 Coll., as amended. Compare ## 206 ff. Compare ## 227 ff. Cca. EUR 7,000. Cca. EUR 80. Cca EUR 1.

Martin Holler

3. Shareholders

Czech Republic

173

Other fees that have to be taken in account are fees for the application to the Com- 173 mercial Register. The lump sum for the registration of a new company is CZK 5,000,71 fees for any change amount to CZK 1,000,72 fees for the deletion of the company amount to CZK 3,000.73 The Commercial Register is obliged to register a newly established company within 174 15 days as of the delivery of the respective application (under the condition that the application is complete). The Parliament of the Czech Republic recantly passed a new act which shortens the period to 5 days. Such new act has been effective as of July 1, 2005. However, the actual time needed to set up a limited liability company in the Czech Republic is much longer. This is due to the fact that the registration of the company with the Commercial Register is only the last step in a longer process as described above. f)

Company Stationary

The stationary to be used by the limited liability company must provide the business 175 name of the company, the registered seat of the company and its identification number as well as an exact specification of its registration with the Commercial Register.

3.

Shareholders

a)

Rights and Obligations of the Shareholders of a Limited Liability Company

Both rights and obligations of the shareholders of a limited liability company under 176 Czech law are much broader, compared to the shareholders in a joint stock company.74 However, as opposed to the partners in a commercial partnership,75 the shareholders of a limited liability company are not necessarily required to actively participate in the business operations of the company. The enterprise part of the company on a day to day basis is managed by the managing director(s). Often, the managing director is also a shareholder of the company. aa)

Basic Rights

The most important right of the shareholder is of course the shareholder’s right to the 177 profit of the company. The shareholders’ right to the profit share is calculated in proportion to their ownership interests in the company, unless the shareholders’ agreement states otherwise. The respective profit as shown in the balance sheets of the company and the distribution to the shareholders have to be approved by the shareholders’ meeting. The claim of the shareholder to the profit share becomes due within three months after the respective decision of the shareholders’ meeting of the company 71 72 73 74 75

Cca. EUR 160. Cca. EUR 35. Cca. EUR 100. Compare # 32 ff above. Compare ## 261 ff.

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43

178

Czech Republic

III. Limited Liability Company

has been adopted. Any other arrangement between the company and a single shareholder is not legally valid. Any other distribution of money to the shareholders is strictly forbidden, open or even hidden profit distributions to shareholders are to be returned to the company. 178 The shareholders also have a right to any liquidation balance of the company. In case the company is liquidated, such liquidation balance is to be allocated among to the shareholders in the proportion of their ownership interests. 179 The shareholder has further the right to the settlement balance, which arises in case the participation of the shareholder in the company ceases to exist during the life of the company, i. e. due to the death of the shareholder, exclusion of the shareholder form the company etc. The amount of such balance is determined as of the day of the termination of the participation of the shareholder in the company and is paid from the company’s stated capital based on an extraordinary financial statement. 180 As a general rule, the right of the shareholders to participate in the management of the company and their corresponding right to information on the company is limited to their right to participate in the shareholders’ meeting. The shareholder may require information and explanations from the managing directors in the shareholders’ meeting regarding the management and business activities of the company. They are also entitled to inspect any documents of the company and control the data included therein. 181 Under certain conditions, the shareholder may also have the right to convene a shareholders’ meeting of the company. This right is limited to shareholders whose ownership interests exceed at least 10 % of the registered capital. These shareholders are entitled to require from the managing director(s) to convene a shareholders’ meeting. In case the managing director(s) fail(s) to comply with this obligation within one month, the shareholders are entitled to convene the shareholders’ meeting themselves and to take all other necessary steps connected therewith. In the event the company has no managing director the shareholder is always entitled to convene the shareholders’ meeting himself. 182 Further, the shareholder is entitled to bring an action for damages on behalf of the company against the managing director and an action against any shareholder who is in delay with payment of his contribution to the registered capital of the company. bb) Basic Obligations

183 The major obligation of the shareholders of a limited liability company is to make their contribution to the registered capital. Such contribution must be made within the time stated in the shareholders’ agreement of the company, but in any case within five years after the registration of the company. In case the shareholder should be in delay with the fulfillment of this obligation, he is obliged to pay late payment interest on the respective amount as stated in the shareholders’ agreement, or if not stated in the shareholders’ agreement, in the amount of 20 % per year. In such case, the company may give notice to the shareholder and give him an additional period to pay the contribution, which cannot be shorter than three months. The notice must always 44

Martin Holler

3. Shareholders

Czech Republic

184

contain the threat that the shareholder may be excluded from the company in case he does not pay properly. If he fails to pay even in such additional period the shareholders’ meeting may exclude him from the company. Further, if stated in the shareholders’ agreement, the shareholders’ meeting may decide 184 that the shareholders are obliged to pay a special surcharge to the creation of the own capital outside the registered capital up to the amount of one half of the registered capital in proportion to the shareholders’ ownership interests. cc)

Shareholders’ Meeting

The shareholders’ meeting is the supreme body of a limited liability company. All major 185 decisions that affect the rights of the shareholders and the company, are to be taken in the shareholders’ meeting. The right of the shareholder to attend the shareholders’ meeting is one of the most important rights of the shareholder. The shareholder may attend the shareholders’ meeting in person or provide someone with a power of attorney to do so in his name. There are annual shareholders’ meetings and extraordinary shareholders’ meetings of the company. The regular shareholders’ meeting must take place at least once a year /or as often and in such time as stated in the shareholders’ agreement of the company. In any case the annual shareholders’ meeting has to take place at least 6 months after the end of the accounting year of the company. The shareholders’ meeting has to be convened by the managing director(s) of the company. Unless the shareholders’ agreement states otherwise, the quorum needed to take deci- 186 sions in the shareholders’ meeting is reached, if shareholders who possess at least one half of the votes are present. For these purposes each shareholder shall have one vote to each CZK 1,000 of his contribution to the registered capital of the company. dd) Necessary Majority

As a general rule, the shareholders’ meeting takes decisions with the simple majority of 187 votes of the present shareholders. This rule only applies unless the law or the shareholders’ agreement of the company state otherwise. The applicable Czech law requires a majority of at least 2/3 of the votes of the present 188 shareholders for certain decisions of major importance. In general, these are decisions which may have major impact on the structure of the company or on the rights of the shareholders. In particular, these are all changes of the shareholders’ agreement of the company. Also, any increase and decrease of the registered capital of the company requires a 2/3 majority of the vote. The same applies to a capitalization of receivables vis-vis the company. All these decisions must be adopted in the form of a notarial deed. In case the registered capital is decreased irregularly the consent of all shareholders is required. ee)

Restriction on Shareholders’ Rights to Vote

All shareholders are entitled to vote and take decisions in the shareholders’ meeting. 189 Nevertheless, there are certain restrictions on shareholders to perform their voting rights.

Martin Holler

45

190

Czech Republic

III. Limited Liability Company

190 In general, a shareholder shall not perform his voting right, if the shareholders’ meeting is to decide directly over his rights. The most important examples for this are a decision of the shareholders’ meeting on non-monetary contributions of shareholders or the granting of advantages or the waiver of certain obligations of a shareholder vis--vis the company. It also applies in case the shareholders’ meeting shall decide on the recall of a shareholder from his function as a managing director due to a breach of his obligations. The shareholder may further not perform his voting right in case the shareholders’ meeting decides on the exclusion of such shareholder and in case the shareholder is in delay with payment of his investment contribution. 191 The shareholder shall not be obliged to follow any suggestions or proposal by the company or by its managing directors or supervisory board. Consequently, agreements in which the shareholder commits himself to follow orders of the company, the managing director(s) or the supervisory board when voting in the shareholders’ meeting, are invalid under Czech law. The same applies to agreements, under which the shareholder shall be obliged to perform his voting right in a specific way or not at all, if he shall receive a consideration from the company for this. The aforementioned restrictions on the performance of the voting rights by shareholders are also invalid, in case they are incorporated in the shareholders’ agreement. 192 As mentioned earlier, all decisions, which may have a substantial impact on the structure of the company or the framework of its business, are to be taken by the shareholders’ meeting. In particular this applies to all changes of the shareholders’ agreement of the company. Another very important example of decisions, which are necessarily to be taken by the shareholders’ meeting are increases or decreases of the registered capital of the company, including the possibility of capitalization of monetary receivables. 193 The shareholders’ meeting may further appoint and recall the managing director(s) and members of the supervisory board, if any. 194 The shareholders’ meeting also approves the ordinary and extraordinary financial statements and consolidated financial statements of the company. One of the most important decisions, which has to be taken by the shareholders’ meeting, is the allocation of the profit and the profit distribution including a reimbursement for possible loss and the determination of annual royalties. 195 The dissolution of the company requires a decision by the shareholders’ meeting, which also appoints and recalls a liquidator and decides on his remuneration. 196 Any major decisions, which change the structure of the company, also fall within the competence of the shareholders’ meeting, such as mergers with other companies and a possible transfer of all assets to one shareholder, as well as decisions on the division of the company or the change of its legal form. It shall also decide on the conclusion of an agreement on the transfer of all assets or the enterprise of the company or any part thereof.

46

Martin Holler

3. Shareholders

Czech Republic

197

The shareholders’ meeting may approve legal acts, which were made on behalf of the 197 company before its establishment. The shareholders’ meeting also has to approve control agreements, agreements on the transfer of profit and agreements on a silent partnership. It shall also approve any amendments to the aforementioned agreements. If required by the shareholders’ agreement the shareholders’ meeting shall also approve 198 any transfer or pledge of ownership interests in the company. Unless stated otherwise in the shareholders’ agreement the shareholders’ meeting ap- 199 points and recalls the proxy. ff)

The Course of the Shareholders’ Meeting

First, the director opens the meeting and the shareholders’ meeting elects its chairman 200 and a recording clerk. The course of the shareholders’ meeting is recorded in the minutes of the shareholders’ meeting. These minutes must necessarily include the business name and seat of the company, place and time of the shareholders’ meeting, the names of the chairman and the recording clerk. They describe the proceedings of the respective items of the agenda, the decisions and any results of the voting. Any objections to the minutes of the meeting have to be made within 30 days after the shareholders’ meeting took place. The minutes must be signed by the chairman of the shareholders’ meeting and by the recording clerk. They are to be filed with the company for the whole duration of the company. gg) Challenge of Decisions of the Shareholders’ Meeting

Decisions which were taken by the shareholders’ meeting may be challenged by each 201 shareholder, managing director, liquidator of the company and administrator of bankruptcy assets as well as a member of the supervisory board of the company, if any. The aforementioned may challenge the validity of the decisions at court. Such request must be based on the fact that the respective decision is in conflict with the applicable Czech law or the shareholders’ agreement, foundation deed or the articles of association. Any right to challenge decisions of the shareholders’ meeting must be exercised within 3 months from the day when the shareholders’ meeting took place. In case the shareholders’ meeting was not convened ordinarily, the applicant must challenge this at court within 3 months from the day when he first learned about the fact, that the shareholders’ meeting took place. In any case, the validity of decisions taken by the shareholders’ meeting must be challenged within one year from the day when the shareholders’ meeting took place. The competent court may not rule that the respective decision is invalid, if the decision was indeed in breach of the respective law, the shareholders’ agreement, foundation deed or the articles of association, but consequently only led to a non-material breach of the applicant’s rights without major legal impact. The court may also not decide on the invalidity of the merger, a transfer of assets, a division of the company or the change of its legal form, if it has been validly registered with the Commercial Register. hh) Shareholders’ Decisions without Shareholders’ Meeting

Shareholders of a limited liability company may also take decisions outside of the 202 shareholders’ meeting. In such case, the managing director or a shareholder, who is Martin Holler

47

203

Czech Republic

III. Limited Liability Company

entitled to convene a shareholders’ meeting76 may submit a proposal for a resolution to all shareholders with a request to submit comments to it within a certain period of time. In case a shareholder does not respond accordingly within the set time limit, it is assumed that he disagrees with the proposal. The person, who submitted the proposal shall notify all shareholders of the final result of the voting. 203 In case the company has only a sole shareholder, a shareholders’ meeting does not take place. All decisions which fall within the competence of the shareholders’ meeting are taken by the sole shareholder instead. c)

Ownership Interest of a Limited Liability Company

204 The ownership interest of a limited liability company represents the participation of the shareholder in the company and related rights and obligations. The amount of the ownership interest is determined by the proportion of the investment contribution to the registered capital of the company. 205 Each shareholder may possess only one ownership interest. In case the shareholder makes further contributions to the registered capital its ownership interest is increased accordingly. On the other hand one ownership interest may be owned by several persons. Such persons may execute their rights related to the ownership interest only through their joint representative. d)

Transfer of Ownership Interest

206 An ownership interest may be transferred to any other shareholder only with the prior consent of the shareholders’ meeting. If permitted by the shareholders’ agreement the ownership interest may be transferred also to a third party. Such transfer may be also conditional upon the consent of the shareholders’ meeting. However, in the event the company has only a sole shareholder the ownership interest shall be always transferable to third parties. 207 The agreement on transfer of the ownership interest must be in writing. The transfer agreement must further include the statement of the acquirer of the ownership interest that it accedes to the shareholders’ agreement or the articles of association, if applicable. The signatures on the agreement must be officially verified. 208 The change of the shareholder must be registered in the list of the shareholders maintained by the company without undue delay and of course into the Commercial Register. However, the transfer of the ownership interest becomes legally effective as of the execution of the respective transfer agreement. Vis--vis the company the transfer becomes legally effective when a copy of such agreement is delivered to the company.

76

48

Compare # 181 above.

Martin Holler

4. The Shareholders’ Agreement

e)

Czech Republic

209

Acquisition of Its Own Ownership Interest by the Company

As a general rule, the company may not acquire its own ownership interests. However 209 in some special cases it may happen that the company acquires its own ownership interest, e. g. in the event the ownership interest passes from the excluded shareholder to the company. The company may transfer the ownership interest to another shareholder or to any third party. Should the company decide not to transfer the ownership interest, it is obliged within six months after the exclusion of the shareholder to decrease the registered capital by the investment contribution of the excluded shareholder or to decide that the remaining shareholders shall take over the ownership interest in proportion to their ownership interests. In case the company fails to comply with this obligation the court may order its dissolution. For the time period during which the company possesses its own ownership interest, the 210 rights connected thereto cannot be performed.

4.

The Shareholders’ Agreement

The shareholders’ agreement of a limited liability company constitutes the major legal 211 framework for the structure of the company. It governs the relations between the shareholders, the managing directors and the supervisory board as well as the major characteristics of the company. a)

Mandatory Content

Under Czech law, the shareholders’ agreement of a limited liability company must state 212 the name under which the company shall conduct its business. It shall also provide the seat of the company and the subject of the company’s business. The shareholders’ agreement also must describe the registered capital of the company, the amount of the investment contribution of each shareholder including the time and manner of its payment. The shareholders’ agreement also must contain the names of the first managing direc- 213 tor(s) and the members of the supervisory board, if established. Mandatory content of the shareholders’ agreement is also the determination of the 214 contribution administrator. b)

Optional Provisions

In addition to the mandatory content, the shareholders’ agreement may stipulate a large 215 variety of optional provisions. The Czech Commercial Code in numerous cases enables the parties to chose from different possibilities to regulate the relations between shareholders and the company under the condition that such case is expressly stipulated by the shareholders’ agreement. The Commercial Code namely mentions the possibility to

Martin Holler

49

216

Czech Republic

III. Limited Liability Company

issue articles of association, which would describe in detail the internal organization of the company. c)

Change of the Shareholders’ Agreement

216 The shareholders’ agreement may be changed only by decision of the shareholders’ meeting. Such procedure corresponds to the importance of this document. Every time the shareholders’ agreement is changed the managing director is obliged to restate the full new wording of the agreement. 217 Every amendment of the shareholders’ agreement requires registration into the Commercial Register. This requirement does not necessarily mean that changes always become effective as of registration. This only applies to certain changes, i. e. the increase or decrease of the registered capital. In contrast, some changes require for their effectiveness only the decision of the shareholders’ meeting or may even become effective later if this is stated by such decision. 218 Any change to the shareholders’ agreement must necessarily be made in the form of a notarial deed. d)

Increase and Decrease of the Registered Capital of the Limited Liability Company

aa)

Increase of the Registered Capital

219 An increase of the registered capital of a limited liability company may be decided only by the shareholders’ meeting and only in case current monetary contributions to the registered capital of the company have been fully paid up. 220 There are basically two methods to increase the registered capital. It may be realized by additional required contributions or from the company’s own sources. 221 The resolution of the shareholders’ meeting on increase of the registered capital by the means of increase of the investment contributions must contain the amount by which the registered capital is to be increased and the time period when the obligation to increase the investment contribution must be handed over. 222 Each shareholder of a limited liability company has a special priority right to take over the obligation to increase its investment contribution in proportion to their ownership interests. In case a shareholder does not use or waives such priority right, the obligation may be passed on to any third party under the condition that the assignment of the obligation is approved by the shareholders’ meeting. 223 The second method to increase the registered capital is from the company’s own sources. Such increase is made from the net profit of the company or from other sources as stated in the financial statement of the company.

50

Martin Holler

5. The Managing Director(s)

Czech Republic

224

Without undue delay after the payment of at least 30 % of the investment contribution, 224 the managing directors are obliged to submit to the Commercial Register an application for registration. The increase becomes effective as of the registration with the Commercial Register. bb) Decrease of the Registered Capital

A decrease of the registered capital is also decided by the shareholders’ meeting. The 225 basic rule governing this procedure is that the registered capital may never decrease under the limit stated by the law, i. e. in this case under CZK 200,000. A decrease of the registered capital may have a major impact on the position of the 226 company’s creditors. Consequently, the Czech Commercial Code includes several provisions protecting the creditors. As a general rule, the company must always ensure that the recoverability of the receivables of the company’s creditors shall not worsen by such decrease. In this regard the managing directors are obliged within 15 days from the adoption of the decision on the decrease of the registered capital twice in sequence, and, at the same time within 30 days to inform third parties and all known company’s creditors of this fact. The creditors are thereafter entitled to require additional security for their non-paid receivables within 90 days from such notification, which were not due at the time of delivery of the notification.

5.

The Managing Director(s)77

The company may have one or more managing directors, who are appointed and 227 recalled by the shareholders’ meeting. The relationship between a managing director and the company is governed by a so- 228 called “Agreement on Performance of Function”.78 Such agreement requires written form and must be approved by the shareholders’ meeting. In case such agreement is not concluded the relationship between the managing director and the company shall be governed by the legal provisions regarding the mandate agreement.79 Each managing director must comply with the following conditions: – must be at least 18 years old; – must be fully capable to make legal acts; – is irreproachable in the meaning of the Act on Trade Licenses; – there is no obstacle as defined in the Act on Trade Licenses; – must not conduct business in the same or similar field of business as the company; – must not conduct business in another company as an unlimited partner or as a controlling person of another person with the same or similar subject of business;

77 78 79

§§ 133 of the Commercial Code. § 66 section 2 of the Commercial Code – ‘‘smlouva o vy´konu funkce’’. §§ 566 of the Commercial Code.

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229

230

Czech Republic

III. Limited Liability Company

– must not perform the function of a statutory body in a company with the same or similar subject of business, this does not apply to related companies. 230 A managing director may also be a foreigner. For this purposes a resident permit is required. This rule does not apply to citizens of a member state of the European Union. a)

Management and Representation

231 The managing director is entitled to decide on all issues concerning the company, unless the law or the shareholders’ agreement expressly reserves the respective rights to other bodies of the company. 232 Unless stipulated otherwise in the shareholders’ agreement or shareholders’ decision, each managing director is entitled to act on behalf of the company independently. In any case the managing director(s) and the manner through which they act on behalf of the company must be registered in the Commercial Register. In general, the managing director is obliged to observe the rules and instructions approved by the shareholders’ meeting. 233 The managing directors are obliged to act with the care of a prudent businessman and to keep all confidential information secret. Should the managing director cause any damage to the company, he shall be liable for such damage. Any agreement, which would exclude or restrict his liability in this respect, is invalid.

6.

Supervisory Board80

a)

Members

234 The supervisory board is not a mandatory body of the company, it is established only in case it is expressly stipulated by the shareholders’ agreement. If established, it must have at least three members. 235 The members of the supervisory board must comply with the same conditions as the managing directors. 81 In addition, a member of the supervisory board may not simultaneously perform the function of a managing director of the company. b)

Competence

236 The main objective of the supervisory board is to oversee the performance of the managing director(s) and the business activity of the company. In order to perform this function, the supervisory board is entitled to inspect all documents concerning the activity of the company and control if the accounting is kept in accordance with the applicable law. 80 81

52

§§ 137 of the Commercial Code. Compare # 229 above.

Martin Holler

7. Liabilities of the Limited Liability Company

Czech Republic

237

One of the most important functions of the supervisory board is to review the ordinary, 237 extraordinary and consolidated financial statements of the company as well as the interlocutory financial statements and proposals on allocation of profit or loss. The supervisory board is entitled to convene the shareholders’ meeting. The members of 238 the supervisory board may attend the shareholders’ meeting and are obliged to acquaint the shareholders’ meeting with the results of their control activity.

7.

Liabilities of the Limited Liability Company

In general the limited liability company is a legal entity and thus is fully liable for its 239 actions with all its assets. However, prior to the registration of the payment of the contributions into the Commercial Register the shareholders jointly and severally guarantee all obligations of the company up to the amount of their non-paid contributions. a)

Special Relations Between the Company and the Managing directors

The possible abuse of the close relations between the company and its managing 240 director lead to special provisions in the Czech Commercial Code. Any payment in favor of the managing director, to which this person is not entitled 241 according to the law, an internal rule or an agreement on performance of the function, may be granted only with the approval of the shareholders’ meeting. The granting of loans to the managing director or a member of the supervisory board is 242 also subject to certain restrictions. A loan agreement or any agreement securing the loan concluded with an managing director, a member of a supervisory board, a proxy or another person entitled to conclude such agreement on behalf of the company or with persons closely related to them or any transfer of property free of charge may be realized only upon prior approval of the shareholders’ meeting. The respective agreements may only be concluded under conditions usual in normal business relations.

8.

Accounting

a)

Financial Statements

The limited liability company is obliged to maintain proper bookkeeping in accordance 243 with Czech accounting standards. In the frame of this obligation the company is above all obliged to issue all financial statements and the annual report. The business year of the company must be the calendar year. The financial statement contains the balance sheet, a report on profit and loss and 244 annexes evidencing this. It may also contain a summary of cash flow or a summary of the change of the core capital.

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245

Czech Republic

III. Limited Liability Company

245 The Commercial Code distinguishes between the ordinary financial statement which is made regularly as of the last day of the accounting year and the extraordinary financial statement required for special events. 246 The company is also obliged to issue an annual report describing the development and the business state of the company. 247 Further conditions are stated in the Accounting Act.82 b)

Audit Requirements

248 According to the Accounting Act a limited liability company must under certain conditions have its financial statement and the annual report verified by a registered auditor. This is required if the company fulfills at least two of the following three conditions: the equity of the company exceeds CZK 40,000,00083 or the turnover of the company exceeds CZK 80,000,00084 or if the average number of the company’s employees exceeds 50. c)

Reserves

249 A limited liability company is obliged to create a reserve fund in the time and in the amount stated in its shareholders’ agreement. 85 The reserve fund is created from the net profit as shown in the ordinary financial statement. 250 The reserve fund is annually replenished by the sum as stated in the shareholders’ agreement, which shall equal at least 5% of the net profit. The reserve fund is filled up to the amount stated by the shareholders’ agreement, but in any case up to at least 10 % of the registered capital. 251 The reserve fund up to the amount of 10% of the registered capital may be used only for a possible reimbursement of any loss. The disposition with the reserve fund pertains to the managing director.

9.

Taxation

252 Several taxes are applicable for limited liability companies in the Czech Republic.

82 83 84 85

54

Act no. 563/1991 Coll., on Accounting, as amended. Cca. 1,400,000 Euro. Cca. 2,800,000 Euro. § 124 of the Commercial Code.

Martin Holler

10. Termination of the business

a)

Czech Republic

253

Corporate Income Tax86

The income tax for legal entities under Czech law amounts to 26%. 87 The law recognizes several exceptions when lower rates are applicable (5% or 15%). b)

Value Added Tax88

The rate of the value added tax in the Czech Republic amounts to 19%, a special decreased rate of 5% is used in certain cases. c)

Other taxes

Other taxes such as consumption tax, real estate tax, real estate transfer tax and others may be applicable.

10. Termination of the business The precise moment when a company ceases to exist is its deletion from the Commer- 253 cial Register. Before this, the company must be dissoluted either with or without liquidation. The dissolution of the company without liquidation is possible only in case the rights and obligations of the company pass to another entity. a)

Dissolution of the Company 89

The company is automatically dissolved by the expiration of the time for which it was 254 established or by the achievement of the purpose for which it was founded. The dissolution may only be decided by the shareholders. Further the company may be dissolved by the decision of a state authority, i. e. on the day stated in the respective court decision or by the termination of the bankruptcy proceedings or by the rejection of a bankruptcy petition due to a lack of assets. The court decision mentioned above may dissolve the company only in special cases 255 defined by law. It applies, if the shareholders’ meeting of the company did not take place within the preceeding two years or if a managing director has not been appointed in the preceeding year or if the company has not conducted any business for a period longer than two years. Another special case is if the company loses its business licenses or in case the legal requirements for the establishment of the company perished. The dissolution may also occur if the company breaches its obligation to create the reserve fund or failed to comply with an obligation to sell the enterprise as imposed by the Antimonopoly Office.90 86 87 88 89 90

Act no. 586/1992 Coll., on Income Tax, as amended. 24% as of 1. January 2006. Act no. 235/2004 Coll., on Value Added Tax, as amended. § 68 of the Commercial Code. Czech ‘‘U´rˇad na ochranu hospoda´rˇske´ souteˇzˇe’’.

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55

256

b)

Czech Republic

IV. Other Corporate Forms in the Czech Republic

Liquidation of the Company

256 The company enters into the liquidation phase as of the day of its dissolution. Such fact must be registered in the Commercial Register and the company has to use the attachment “in liquidation” in connection with its business name. 257 As soon as the company enters into liquidation a liquidator must be appointed by the shareholders’ meeting. In case the dissolution of the company was imposed by a court, the liquidator is appointed by such court. Once appointed, the liquidator assumes the competence (including responsibilities) of the statutory body to act on behalf of the company. 258 The liquidator is obliged to take all necessary steps to settle the rights and obligations of the company. In order to comply with this obligation the liquidator shall inform all known creditors of the company and prepare a liquidation financial statement of the company including a list of its assets. After the liquidator has taken all necessary steps he issues a liquidation report and makes a proposal for the allocation of the liquidation balance among the shareholders. 259 The liquidation terminates with the allocation of the liquidation profit or by the satisfaction of the creditors from the proceeds from the sale of the company’s assets. 260 Within a period of 30 days after the termination of the liquidation the liquidator is obliged to file an application for deletion of the company from the Commercial Register.

IV. Other Corporate Forms in the Czech Republic In addition to the corporate forms mentioned above, i. e. the joint stock company and the limited liability company, the Czech Republic also recognizes two other types of companies – the commercial partnership and the limited partnership. Both of these corporate forms are based on personal ground, which means the personality of their founders and shareholders is inseparably bound to the life of the company.

1.

Commercial Partnership91

261 The commercial partnership is a company in which at least two persons conduct business under a joint business name and guarantee the obligations of the company jointly and severally with all their personal assets.

91

56

Czech ‘‘verˇejna´ obchodnı´ spolecˇnost’’, v. o. s.

Martin Holler

2. Limited partnership

Czech Republic

262

The shareholder of such a company may be both a person or a legal entity. Rights and 262 obligations of the partners are stipulated in the partnership agreement. Unless stated otherwise herein, all major decisions concerning the company must be adopted by all partners. Business management of the company belongs to each of the partners in accordance 263 with the rules agreed by the partners. When managing the company the partners are obliged to act with the care of a proper businessmen. Any profit is allocated between the partners in equal proportions as well as any loss, if not agreed otherwise. The statutory body of the company, i. e. the body entitled to act on behalf of the 264 company vis--vis third parties, are all partners. Each of them is entitled to act on behalf of the company independently.

2.

Limited partnership92

The limited partnership is a combined form of a commercial partnership and a limited 265 liability company. It is typical for such a company that one or more partners secure the obligations of the company by all their personal assets (so-called general partners93) and one or more of the partners secure the obligations of the company up to the amount of its non-paid investment contribution as registered in the Commercial Register (socalled limited partners94). The commercial management of the limited partnership is the responsibility of the 266 general partners. Other issues concerning the company are decided both by the general and limited partners by the majority of votes, unless stipulated otherwise in the parnership agreement. The basic obligation of the limited partners is to make the investment contributions to the company. The amount of such investment contributions is at least CZK 5,000.95 The limited partners on the other hand have the right to inspect the accounting documents of the company and control the data included therein. Profit is allocated into two parts, one belonging to the general partners and one to the 267 company. The part allocated to the company is distributed among the limited partners after the taxation in the proportion stated in the shareholders’ agreement or if not stated in the proportion of their paid-up contributions. The statutory body of the company are the general partners; each of them is entitled to 268 act on behalf of the company independently.

92 93 94 95

Czech ‘‘komanditnı´ spolecˇnost’’, k. s. Czech ‘‘komplementa´rˇ ’’. Czech ‘‘komanditista’’. Cca. EUR 170.

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268

V.

Czech Republic

V. Branch Office of Foreign Entity in the Czech Republic

Branch Office of Foreign Entity in the Czech Republic

In general a foreign entity may conduct business on the territory of the Czech Republic under the same conditions and to the same extent as Czech entities unless the applicable law expresly states otherwise. The respective provisions of the Czech Commercial Code96 consider a foreign entity to be a person with its seat outside the Czech Republic. Such foreign entity may operate its business through its enterprise or branch office located in the Czech Republic. In any case the branch office and the scope of business activities is subject to registration in the Commercial Register. To avoid any difficulties and to ensure the smooth operation of the branch office, Czech law requires that each branch office is represented by a head of such branch office,97 a responsible person entitled to act on behalf of the foreign entity. A branch office is established upon decision of the respective foreign entity. The other steps are similar to those pertaining to other corporate forms, i. e. the branch office has to acquire all necessary permissions for conducting its business in the Czech Republic, it has to have sufficient legal title to the premises of its seat etc. After all these conditions are fulfilled the registration into the Commercial Register follows. The procedure of closure of a branch office is again very similar to other corporate forms and starts by the decision of the company on termination of the branch office and is consequently terminated by its deletion from the Commercial Register. 96 97

58

§§ 21 of the Commercial Code. Czech ‘‘vedoucı´ organizacˇnı´ slozˇky’’.

Martin Holler

England Jeff McGeachie

Table of Contents I.

Survey

II. Private Limited Companies and PLCs 1.

Introduction

2. a) b) c) d) e) f) 3. a) b) c) d) e)

Formation and Share Capital Membership Share Capital The Nature of Share Capital Foreign Currency Denomination Treasury Shares Basic Constitutional Documents Incorporation Procedure Procedure Shelf Companies Pre-Incorporation Contracts Execution of Documents Re-registration as a means of altering a company’s status A Company’s Membership Names Capital Allotment of Shares Maintenance of Capital Acquisition of Own Shares Purchase of Own Shares out of Capital Redemption of Share Capital Financial Assistance The Shareholders Rights and Duties of a Shareholder Dividend Rights Rights of minority shareholders Exceptions to the rule in Foss v Harbottle Companies Act Section 459 Meetings of Shareholders Notice

f) g) 4. a) b) c) d) e) f) 5. a) b) c) d) e) f) g)

Jeff McGeachie

61 62 62 62 62 63 63 64 64 64 65 65 65 65 66

h) i) j) k) l) m) n) 6. a) b) c) d) e) f) g) h) i) j)

66 67 67 68 68 69 70 72 73 73 74 74 75 76

c)

77 78 78 79

d) e) f) g)

k) l) m) n) o) p) 7. a) b)

Proxies Votes Corporate Representative Resolutions Extraordinary and Special Resolutions Elective Resolutions of Private Companies Written Resolutions The Directors Number of Directors Resolution to remove director Other provisions Fair Dealing Directors’ Fixed Term Contracts Substantial Property Transactions Directors’ Duties – Proposals for Change Loans to Directors Who is Liable as a Director? Director’s authority to bind the company Fiduciary Duties Duty of Confidentiality Duties of Skill and Care and Diligence Directors’ Duties On Insolvency Directors’ Disqualification Disclosure of Information relating to Directors The Accounts and Audit Basic Requirements Financial Year and Accounting Reference Period Balance Sheet and Profit and Loss Account Responsibilities of Directors Period for laying of accounts Small companies Election Resolution Procedure

80 80 80 80 80 81 81 81 81 82 83 83 83 84 84 84 84 85 85 86 86 86 87 88 88 88 89 90 90 91 91 92

59

England 8. a) b) c) d) e) f) g) 9. a) b) 10. a) b) 11. a) b) 12. a) b) c) 13. a)

Auditors Basic Requirements Elective Resolution Rights of Access Provision of Misleading Information Attendance at General Meetings Remuneration Removal of Auditors Registration of Charges Registration Requirements Maintenance of Register Arrangements and Reconstructions Compromise Arrangement Reconstructions Takeovers and Compulsory Acquisitions of Minority Shareholders Compulsory Acquisition Conditions Investigation of Companies and their Affairs Appointment at Request of Members Power of Court Investigation as to Ownership Insolvency Introduction

Index 93 93 93 93 93 93 94 94 94 94 95 95 95 95 95 95 96 96 96 96 96 97 97

b) Company Voluntary Arrangements (CVA) (IA section 1(1)) c) Administration d) Voluntary Winding-Up and Compulsory Winding-Up

III. Limited Liability Partnerships 1. 2. 3. 4. 5.

Introduction LLP Incorporation formalities Confidentiality Commencement and cessation of Membership 6. Agency 7. Designated Members 8. Changes to Membership 9. Insolvency and Winding-up 10. Other Provisions

97 99 101 102 102 102 103 103 103 104 104 104 105 105

IV. Branches of foreign Companies/

Places of Business 1. 2. 3.

Introduction Branch Registration Registration of a place of Business

105 105 105 106

Index Accounting Reference Period 220, 221, 222, 224, 225, 238, 239, 240 Accounts 82, 114, 115, 214, 216, 220, 228, 229, 230, 231, 233, 235, 236, 237, 238, 241, 242, 247, 249, 250, 252, 253, 254, 255, 259, 342, 345, 352 Administrators 266, 280, 284, 293, 300, 301, 302, 304, 306, 307, 312 Articles of Association 20, 23, 24, 109, 166, 193 Auditors 35, 84, 102, 157, 161, 175, 233, 234, 235, 247, 250, 251, 252, 253, 254, 255, 257, 258, 260, 261, 263, 342, 352 Balance sheet 35, 36, 216, 226, 227, 229, 230, 233, 242, 244 Branch 1, 347, 349, 351, 353, 354

60

Capital 10, 11, 12, 13, 15, 16, 17, 19, 24, 35, 38, 39, 50, 53, 56, 57, 58, 60, 62, 63, 64, 65, 66, 67, 77, 79, 81, 82, 83, 84, 91, 92, 104, 111, 112, 113, 327, 328 Allotment 16, 54, 55, 100, 132, 270 Maintenance 56, 67, 92, 111, 328 Purchase of Own Shares 59, 68, 75, 81 Redemption 53, 79, 83, 87, 88, 89, 91, 111, 113 Director 25, 29, 34, 46, 51, 66, 84, 102, 103, 105, 106, 107, 109, 116(ii), 124, 125, 126, 145, 6, 163, 164, 165, 166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 177, 178, 179, 180, 181, 183, 184, 185, 186, 187, 188, 189, 192, 193, 194, 195, 196, 197, 200, 201, 202, 202(ii), 205, 206, 209, 210, 211, 212, 214, 215, 216, 226, 229, 230, 231,

Jeff McGeachie

Index / I. Survey 232, 233, 235, 237, 241, 255, 269, 272, 277, 281, 284, 287, 288, 302(i), 302(iii), 307, 314, 316, 320, 330, 341, 344, 353, 354 Appointment 165, 166, 167, 169, 189, 253, 261, 1 291, 304, 305, 306, 311, 312, 313 Disqualification 201, 202, 205 Duties 185, 6.11, 193, 194, 255, 281, 339 Fiduciary Duties 194 Loans 156, 186 Removal 171, 261 Remuneration 177, 258, 259 Transactions 328 Dividends 50, 62, 104 declaration 33, 182, 184, 102, 306, 316, 318, 332, 354 distributable reserves 62, 113 Financial Assistance 92, 98, 102 Financial Year 220, 221, 222, 226, 232, 237 Incorporation 25, 27, 30, 33, 140, 223, 224, 239, 331, 333, 334, 4, 336, 5, 337, 342 Investigations 204 Meetings 137, 137(i), 137(ii), 137(iii), 146, 149, 153, 162, 169, 235, 249, 257, 285, 286 Notice 106, 107, 138, 145, 146, 151, 155, 5.13, 158, 167, 170, 180, 225, 261, 263, 269, 272, 273, 306, 309, 310, 338 Proxies 150 Votes 74, 119, 145, 147, 149, 152, 340 Overseas 70

I.

England

1

Place of Business 348, 349, 354 Profit and Loss Account 62, 216, 226 Public Limited Company/plc 44 Resolutions 103, 159, 160, 161, 318 Ordinary 63, 109, 5.12, 156, 170, 261, 307 Extraordinary 66, 137(ii), 145, 149, 155, 159, 318 Written 73, 112, 160, 161 Elective 49, 148, 157, 158, 159, 250 Secretary 25, 44, 144, 163, 164, 165, 201, 209, 241, 249, 260, 274, 275, 276, 287, 320, 336, 352, 354 Shareholder 13, 29, 50, 65, 88, 104, 105, 106, 116, 116(ii), 118, 125, 126, 129, 135, 137, 139, 142, 143, 145, 146, 149, 150, 160, 174, 179, 192, 249, 250, 261, 273 Shares 4(i), 5, 8, 8(ii), 10, 12, 14, 15, 16, 18, 19 (and footnote), 29, 36, 42, 46, 47, 50, 52, 53, 54, 55, 59, 67, 68, 69, 71, 72, 74, 75, 77, 78, 79, 80, 81, 82, 83, 88, 90, 91, 92, 93, 94, 96, 100, 111, 121, 132, 145, 149, 152, 166, 179, 213, 249, 270, 271, 273, 274 Allotment 16, 54, 55, 100, 132, 270 Discount 54 Premium 16, 53, 55, 114 Redeemable 53, 72, 80, 88, 90 Ultra Vires 22, 123(i), 124 Winding-Up 104, 111, 279(iii), 316, 317, 318, 320, 321, 344

Survey

English corporate law is a peculiar mix of legislation derived from the European Union 1 (e.g. the Eleventh Directive on Branch registration), domestic legislation and the common law as derived mainly from precedent. The domestic legislation makes up the bulk of the law. In particular the Companies Act 2 1985 and the Insolvency Act 1986 form the bedrock of English law of corporations. This chapter does not deal with the specifics of financial services or banking regulation as set out in the Financial Services and Markets Act 2000 or the Banking Act 1994 but these are obviously of importance when analysing corporate law overall. In addition the legislation and codes of conduct which surround publicly traded securities are not really dealt with in this chapter.

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3

England

II. Private Limited Companies and PLCs

3 The important thing to recognise is that the legislation is not a code from which law is determined. If there is a gap in the legislation, precedent and the common law will be used to fill that gap. This is an important philosophical distinction between English corporate law and the corporate law of civil, code-based jurisdictions.

II. Private Limited Companies and PLCs 1.

Introduction

4 Incorporated companies in England and Wales come in three forms:1 (i) Companies limited by shares; (ii) Companies limited by guarantee; (iii) Unlimited companies. 5 Of these forms, by far the most important and well used for commercial purposes are companies limited by shares. 6 Companies limited by guarantee are generally used as the corporate vehicle for sports clubs and non profit making entities. The basic requirement is that the members must agree to accept liability for all debts of the company to the level of the guaranteed amount (normally £ 1). 7 Unlimited companies are companies where there is no limit on the liability of members. They are not in common use but can have a place in certain tax-efficient corporate structures. 8 Companies limited by shares in turn come in two forms: (i) Public companies; (ii) All other companies limited by shares which are not public companies (referred to below as “private” companies).

2.

Formation and Share Capital

a)

Membership

9 A private company and a company limited by guarantee can be registered with only one member. A public company must have two members although there are proposals to make a change to this rule.

1

62

Section 1 Companies Act 1985 (“CA”).

Jeff McGeachie

2. Formation and Share Capital

b)

England

10

Share Capital

All private and public companies must have a registered share capital and must divide 10 that capital into shares of a fixed amount. The registered share capital is called the authorised share capital. There is a distinction 11 between the authorised and issued share capital. The authorised capital is simply a maximum aggregate share capital (however divided) which the company is authorised to issue to members or prospective members. The issued share capital is the aggregate amount of share capital actually issued to members. For most private companies, the authorised share capital is £ 1,000 divided into 1,000 12 ordinary shares of £ 1 each. In a lot of cases only two shares will have been issued. c)

The Nature of Share Capital

It is important at the outset to understand the nature of a share. A company’s share 13 capital represents the amount of money or monies worth which the shareholders contribute as capital (rather than loan or gift). It is in essence a debt that a company owes to its members. That debt ranks last in terms of the company’s debts and obligations and falls to be satisfied out of the assets of the company on a winding up after all other creditors have been paid in full. A private company can issue shares fully, partly or nil paid. This means that the 14 company has an ability (in the case of partly or nil paid shares) at any time to issue a “call” to members to pay to the company the amount of any shares issued which have not been paid in full. The authorised share capital is divided into a fixed number of shares of a given value. 15 This given value is the “par” or nominal value of each share. A share is issued at a “premium” if the allottee (the person having an unconditional 16 right to be allotted or issued shares in a company) agrees to pay more for that share than the par value of that share in relation to his share allotment. The premium is the excess of the allotment price over the nominal value. The excess is paid into the share premium account.2 The nominal value is paid into the company’s share capital account. A public company must have an authorised share capital of £ 50,000 in nominal value, 17 of which at least a quarter must have been paid. There is no minimum required for a private company.

2

CA Section 130.

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63

18

England

d)

Foreign Currency Denomination

II. Private Limited Companies and PLCs

18 Until Re Scandinavian Bank Group plc,3 it had not been clear if a company could issue shares denominated in a currency other than sterling. The decision here was that there was no reason in principle why foreign currency shares could not exist. Any perceived exchange rate problems were irrelevant as the requirement in CA section 2 was to issue shares fixed in amount not value. e)

Treasury Shares

19 Public companies that are listed may be able to hold up to 10 per cent. of their issued share capital on their own behalf as treasury shares with these shares being available for sale or transfer to an employees’ share scheme. 4 f)

Basic Constitutional Documents

20 The basic constitutional documents of any incorporated company are the Memorandum of Association5 and the Articles of Association.6 21 The Memorandum sets out the name of the company, the situation of the registered office and the purposes for which the company was formed (the “objects”) as well as the intended status of the company. The form of the Memorandum of Association is dictated by statute.7 The objects can be altered by special resolution of the members (see below at 5 # 156). 22 The objects clause stipulates precisely what the company can and cannot do (i.e. what acts are intra vires and what acts are ultra vires). The ultra vires doctrine was a body of law designed to operate in circumstances where it was alleged that an act of the company was void as being outside the scope of the objects clause. Ultra vires acts also formed one of the key exceptions to the rule in Foss v Harbottle (see # 117 below). The doctrine was effectively abolished by the Companies Act 1989 although members have a new statutory right to prevent acts from occurring which would have been ultra vires. 23 The Articles of Association are essentially the regulations governing conduct of the company. The Articles can either be custom drafted or adopted in whole or in part from standard regulations set out in the legislation and known as Tables A, C, D and E (depending on the type of incorporated company). Table A is the template which governs private limited companies. It is not compulsory to adopt Table A.

3 4

5 6 7

64

[1987] 2 WLR 752. The Companies (Acquisition of Own Shares) (Treasury Shares) Regulations 2003 (S. 2003 No. 1116 amending CA section 162). CA section 2. CA section 7. CA section 3.

Jeff McGeachie

3. Incorporation Procedure

England

24

The Articles of Association can be altered by special resolution of the members. No 24 alteration of either the Memorandum or the Articles can be enforced against a member if it purports to increase the capital contribution required from that member or increases his liability in any way.8

3.

Incorporation Procedure

a)

Procedure

The incorporation procedure starts with the sending to Companies House of the Mem- 25 orandum and Articles together with a statement (in a prescribed form) of the first directors and secretary. These individuals will also sign a form indicating their consent to serve as director or secretary. The Memorandum will have been signed by the subscribers (essentially the founder 26 members) who shall also complete the prescribed statement. Once the Registrar of Companies is satisfied that all the requirements of the Companies 27 Act have been satisfied, a Certificate of Incorporation will be issued, which certificate is conclusive evidence of the incorporation of the company. 9 The effect of registration is to bind the company and the members to the provisions set 28 out in the Memorandum and Articles as if each such party had individually executed the same.10 b)

Shelf Companies

It is possible to acquire “shelf companies” which are incorporated companies available 29 for purchase. These shelf companies will not have traded and will exist solely to save the time and administrative issues involved in incorporating new companies. Commonly the total cost of acquisition will be about £ 1,250 and the transaction can be done in a matter of hours provided the acquirer is able to provide new directors and shareholders willing to take a transfer of the subscriber shares (which will be the only shares in issue at the relevant time). c)

Pre-Incorporation Contracts

At common law, documents entered into pre-incorporation purportedly by a company 30 could only take effect if they could be interpreted as personal obligations of the signatories or the apparent agents of the company.11 Newborne v Sensolid (Great Britain)

8

10

CA section 16. CA section 13. CA section 14.

11

Kelman Baxter (1866) LR 2CP 174.

9

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31

England

II. Private Limited Companies and PLCs

Limited12 established that a pre-incorporation contract was in fact a nullity. This was the case even if the supposed agent or representative of the company believed that incorporation would take place imminently. 31 It is possible however to recover monies paid over in furtherance of a pre-incorporation contract.13 32 However, CA section 36(c) now establishes firmly that such contracts do take effect as personal obligations of the person purporting to act for the company. It is then possible to novate the contract or infer from conduct that the newly incorporated company is bound. What cannot happen is that the company attempt in some way to ratify the contract. 33 A public company registered as such on its original incorporation must not do business of any kind prior to the issue of a certificate from the Registrar (which will be issued following lodging by the company of a statutory declaration in the approved form). d)

Execution of Documents

34 The directors have generally unlimited power to bind a company14 when the person they are dealing with is acting in good faith. There is no duty to enquire if an act is outside the powers of the Board of Directors or not within the scope of the company’s constitution. e)

Re-registration as a means of altering a company’s status

35 CA section 43 provides that if a special resolution is passed and the necessary application filed, then a private company may apply to be re-registered as a public company. In addition the auditors are required to certify that, as at the balance sheet date, the net assets are not less than the sum of called up capital and reserves available for distribution. 36 To the extent that shares have been allotted for a non-cash consideration between the balance sheet date and the passing of the special resolution, the non-cash assets will need to be valued in accordance with CA section 108. 37 A private company previously registered as unlimited cannot switch to becoming a public company.15

12 13 14 15

66

[1954] 1 QB 45. Rover International Limited v Cannon Film Sales Limited [1987] BCLC 540. CA section 35. CA section 43(1).

Jeff McGeachie

3. Incorporation Procedure

England

38

Obviously the minimum share capital requirements for a public company must also be 38 met (the requirement of a minimum £ 50,000 share capital of which a quarter at least must be paid up).16 It is possible for a public company to become private.17 An application has to be made 39 in the prescribed form and it is open to members holding five per cent. in value or number of the issued share capital to object to the process through the courts.18 f)

A Company’s Membership

Every person who agrees to become a member and whose name is entered on the 40 Register of Members is a member.19 No body corporate can be a member of the company which is its holding company.20 41 A private company limited by shares and a company limited by guarantee can have one 42 member; any other company must have at least two members.21 g)

Names

The provisions of CA section 26 and the Business Names Act 1985 should be borne in 43 mind. Section 26 sets out certain prohibitions on words to be used in corporate names. These 44 include certain misleading uses of the terms “limited”, “unlimited” or “public limited company” or names that are identical to names already on the index of company names. In addition, names which are offensive or criminal in the opinion of the Secretary of State, are forbidden. Names which suggest a connection with Her Majesty’s Government or a local authority are also forbidden. The Business Names Act 1985 (“BNA”) contains some of the provisions of section 26 45 above but applies these to a wider category of entities carrying on business of some kind in the United Kingdom. It also sets out the requirement to put the corporate name on all business communications and display the same information prominently at all business premises. 22 The most significant penalty for breach is potential unenforceability of contracts. 23

16 17 18 19 20 21 22 23

CA section 45(2). CA section 53. CA section 54(1). CA section 35. CA section 23. CA section 24. BNA, section 4. BNA section 6.

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67

46

England

4.

Capital

a)

Allotment of Shares

II. Private Limited Companies and PLCs

46 If the directors wish to issue “relevant securities” (including shares) in a company, the first fundamental is that they need authority. This authority can be specific or general and must be granted by the members in general meeting or set out in the Articles. 47 The authority must be limited to issuing shares to a par value not exceeding the authorised share value. Any authority cannot last for more than 5 years24 and must state the maximum number of relevant securities that can be issued. 48 A private company may elect to disapply the 5 year rule and go for authority to issue for an unlimited duration or fixed duration longer than 5 years. 49 The elective resolution procedure referred to below at 5 and contained in CA section 379 will apply here. 50 In addition to ensuring that the required authority is in place, the rules regarding preemption must be observed.25 There is a statutory requirement that existing shareholders be offered the first chance to subscribe for any new shares to be issued by the company, unless those shares are to be paid for wholly or partly, in something other than cash26 or are issued pursuant to an employees’ share scheme or are to be allotted with limited rights as to dividends and capital upon a distribution.27 51 CA section 90 states that existing members must be given at least 21 days to consider whether or not to accept an offer. The Memorandum or the Articles can contain provisions excluding the operation of this right. 28 In addition where there is authority to issue (an alternative expression is allot), the directors or the company may be given the right to disregard the pre-emption provisions either in the Articles or by way of special resolution. 52 Payment for shares can be in cash or monies worth (including goodwill and know how29). 53 There are no restrictions on the issue of shares at a premium (i.e. at a price greater than the nominal value). A sum equal to the aggregate value of the premiums obtained must be set aside in the share premium account.30 The share premium account is then treated as capital in the ordinary way. The amounts standing to the credit of the share premium 24 25 26 27 28 29 30

68

CA CA CA CA CA CA CA

section section section section section section section

18. 379. 89(4). 94(5). 91(1). 99. 130(1).

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4. Capital

England

54

account can be used to pay for the issue of unissued shares to members or in writing off preliminary expenses of the company or in writing off the expenses of any share or debenture issues, or in providing for any premiums on the redemption of any debentures of the company, or in providing for the re-payment of any premiums payable on redeemable shares (provided such shares were originally issued at a premium).31 Shares cannot be issued at a price less than the nominal value (a “discount”).32 This is 54 easy to deal with in relation to allotment in return for cash. It is less easy where payment is by way of non-cash consideration. Care should therefore be taken to ensure that the value of the non-cash consideration is demonstrably equal to the par value of the shares. The allottee is liable to pay the amount of the discount together with interest.33 A public company cannot issue shares on the basis that payment will be made through 55 the provision of services by another person. If the company issues shares in these circumstances the holder becomes personally liable to pay the company in cash the relevant proportion of their nominal value or premium treated as paid up together with interest.34 In addition, where shares are issued lawfully for non-cash consideration, this consideration must be properly valued with a report on such value having been provided to the company within six months of the allotment.35 These provisions do not apply however to allotments in connection with a merger or “arrangement”. In practice, allotments following a share acquisition are not caught. b)

Maintenance of Capital

One of the fundamental tenets of English company law is the principle of maintenance 56 of capital. This states that a creditor or prospective creditor is entitled to assume that if a company is registered as having an authorised share capital of £ X, then that represents the true position. Broadly this means that a company cannot use its assets or cash in a way that diminishes the registered capital or, put another way, the money raised through share subscriptions should be turned into assets and not unlawfully diminished. There is of course no problem in law if the capital is utilised lawfully. The reality is that the principle is too rigid to be applied rigorously and the legislation gives companies some limited leeway to treat capital more flexibly. There are basically two methods of reducing share capital:

57

a formal court sanctioned capital reduction; or

58

a purchase of own shares as permitted by the Act.

59

31 32 33 34 35

All CA section 130. CA section 100. CA section 100(2). CA section 99(2). CA section 103.

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69

60

England

II. Private Limited Companies and PLCs

60 A reduction in share capital needs to be sanctioned by Court Order as well as authorised in the articles and approved by special resolution (to ensure that the interests of members are protected). 61 The Court process provides a mechanism for creditors to object to the application. 36 62 A company may seek a formal reduction for a number of reasons including the elimination of a deficit on the profit and loss account. The share capital account is a debt account. The elimination or reduction of the debt produces a “profit” to reduce the existing profit and loss deficit. This would, in turn, remove a so-called “dividend block” (bearing in mind that it is unlawful to pay dividends where there are no or insufficient distributable reserves). 63 The reduction of capital provisions applies only to allotted and issued share capital. Provided there is authority in the articles a company can reduce its authorised but unissued share capital by way of ordinary resolution.37 64 In general, a reduction can be structured in any way. The company may cancel or reduce the liability on capital not fully paid, or it can cancel any share capital which is lost or not represented by assets, or it can pay off any paid-up capital if the amounts standing to the credit of the capital are in excess of the needs of the company. 65 In general, companies seeking to return capital to members ask the court to use its discretion to disapply the formal creditors’ protection provisions. Alternative arrangements are usually suggested. The court looks to exercise fair treatment for all shareholders as well as ensure that proper explanations are given. In addition, there is an overall requirement that there be a discernible purpose to the whole project – it goes without saying that creditors’ interests are safeguarded. 66 CA section 142 requires the directors of a public company to convene an extraordinary general meeting of the company when a serious loss of capital occurs. A serious loss of capital arises if the value of the net assets falls below an amount which is less than half of the amount of the called up share capital. The purpose of the meeting is to consider what steps should be taken to deal with the situation. It is not clear what is meant by this. c)

Acquisition of Own Shares

67 The maintenance of capital principle incorporates a general prohibition (fortified by criminal sanction) on a company acquiring its own shares.38 The position is complicated however by certain provisions later on in the Act which operate as exceptions to this general rule.

36 37 38

70

CA section 136. CA section 121(2)(e). CA section 143.

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4. Capital

England

68

The first exception is that a purchase of own shares is permitted if authorised in the 68 articles or by resolution of the members and paid for out of distributable profits or out of the proceeds of a fresh issue of shares. 39 If a company is to take advantage of the ability to purchase own shares out of profits or 69 the proceeds of a fresh issue of shares, it must first determine whether the transaction will be “on” or “off ” market. A private company, by definition, cannot make an onmarket purchase of its own shares. On market purchases are purchases on a recognised investment exchange (which does 70 not include an overseas investment exchange) subject to a “marketing” arrangement. 40 An authority for an on-market purchase can be general or specific but must stipulate the 71 maximum and minimum number of shares to be acquired as well as clearly determine the maximum or minimum price either expressly or by way of a proper formula for calculation. 41 There will also be Stock Exchange and Association of British Insurers (ABI) requirements or, as regards the ABI, guidelines in relation to such purchase. If the result of the proposed purchase would be to leave the company only with 72 redeemable shares in issue then the purchase cannot take place. 42 The contract implementing an off-market sale must be approved in advance by the 73 members by way of special resolution any authority for a private limited company must not be in place for any more than 18 months. That contract must also be available for inspection by the members during the 15 day period before the EGM as well as at the meeting itself. The written resolution procedure can be used as an alternative to an EGM for an off-market purchase. If a member wishes to include in the vote on the resolution the votes applicable to the 74 shares which are themselves the subject of the resolution, he must firstly demand a poll (a form of voting which is more specific than the usual show of hands and seeks to calculate the actual number of votes being cast) and secondly own other shares which are not the subject of the resolution. It is possible to approve a contingent contract for an off-market purchase of own shares. 75 It is also possible to revoke the authority by special resolution.

76

The special resolution must be filed within 15 days. Any purchases pursuant to the 77 contract need to be notified on the prescribed form and the company must keep a copy of the contract at its registered office for 10 years. The beneficial interest in the shares passes to the company on execution if the contract is unconditional or once the 39 40 41 42

CA CA CA CA

section section section section

Jeff McGeachie

162. 163. 166(2)-(6). 162.

71

78

England

II. Private Limited Companies and PLCs

contingency is satisfied. The shares are treated as cancelled on purchase and the amount of the issued share capital is reduced by the total nominal value of the shares purchased. The authorised capital remains the same. 78 Where the contract is a contingent contract there are certain related payments which will have to be made out of distributable funds, e.g. payments made by the company for an option to purchase own shares, or payments made to acquire a variation or release.43 79 Where shares are purchased using distributable profits an amount equal to the reduction in the issued share capital needs to be transferred to a special reserve known as the capital redemption reserve. The amount to be transferred is equal to the nominal amount of the shares purchased (so if a share having a nominal value of £ 1 is bought for £ 10, the company must transfer £ 1 to the capital redemption reserve). 80 There are also provisions permitting the issue of “redeemable” shares as well as the holding of “Treasury” shares by certain companies whose shares are listed on public exchanges.44 81 Another exception is the provision, operating in certain circumstances, under which private companies can use their capital base to fund the purchase of own shares. 45 d)

Purchase of Own Shares out of Capital

82 The basic scenario here is that a private company can, in certain circumstances, pay for the own shares it is acquiring out of capital. The first requirement is that the distributable profits (or the proceeds of a new share issue) need to be exhausted as the first element of any payment. The difference between the price being paid and the available profits (or proceeds of a new share issue) is the “permissible capital payment”.46 The various elements must be ascertained from “relevant” accounts (being accounts which are not older than three months from the date of the statutory declaration referred to below47). 83 The second basic requirement is to consider the nominal value of the shares to be redeemed or purchased. If the permissible capital payment is less than the nominal value of shares in question, the amount of the difference has to be transferred to the capital redemption reserve. 84 The basic procedure for payments out of capital is approval of the members (by special resolution) backed by a statutory declaration of the directors specifying the amount of the permissible capital payment and stipulating that the company is able to pay its debts, and that the company’s prospects for the next 12 months indicate that it will 43 44 45 46 47

72

CA CA CA CA CA

section section section section section

168. 162A-G. 171. 171. 172(3).

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4. Capital

England

85

continue to be able to pay its debts. This declaration must be supported by an auditor’s certificate (in a prescribed form) to the effect that the opinion of the directors as to the prospects of the Company is not unreasonable in all the circumstances. For these purposes the directors must factor in future and contingent liabilities. The courts permit the directors to take a pragmatic view of the likelihood of contingent liabilities all falling due and thereby rendering the company technically insolvent. There are certain time limits in CA section 174 which need to be borne in mind. There 85 are also requirements as to publicity in CA section 175. The whole process is also subject to the scrutiny of the Court if a member or creditor 86 objects. e)

Redemption of Share Capital

CA section 159 gives a company limited by shares the power to issue shares which are to 87

be redeemed (provided that such an issue is authorised by the articles). The redemption may be carried out on such terms as are set out in the articles. It is possible to issue redeemable shares and then stipulate the time when redemption is 88 to occur as well as leave the timetable to be set by the company and/or the shareholder. Payment must be made on redemption and not at any other time.

89

Redeemable shares must be fully paid before they can be redeemed.

90

If the redemption is not made out of capital (i.e. is made wholly out of distributable 91 profits) then a sum equal to the nominal value of the shares must be transferred to the capital redemption reserve. f)

Financial Assistance

An additional limb to the maintenance of capital obligation is that a company (or any 92 of its subsidiaries) may not provide financial assistance for the purchase of its own shares. This is a simple principle to set out but extremely difficult to apply in practice. There are certain obvious instances where the principle would operate (e.g. a company 93 giving or lending money to a buyer of its shares). The prohibition also operates in some less obvious circumstances, for instance, when 94 the buyer of shares agrees to give security to its financiers and that security incorporates the target’s assets. The assistance is prohibited if it is given before or at the same time as the acquisition. 95

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73

96

England

II. Private Limited Companies and PLCs

96 In addition, if a liability of any kind has been incurred already in connection with an acquisition of shares, the company cannot financially assist the acquisition by reducing or discharging that liability. 97 Contravention of section 151 can result in a prison sentence or a fine for every officer who is in default. 98 The legislation sets out certain instances of clear financial assistance as well as an unhelpful catch-all where financial assistance is described as “any other financial assistance given by a company the net assets of which are thereby reduced to a material extent”. 99 There is48 an exception under which there is no contravention if the act in question is not intended primarily to assist the acquisition but is an incidental part of some larger purpose. The truth is that this get out is rarely relied on, the decision in Brady v Brady49 going a long way to render the exception almost worthless. 100 Section 153 also sets out the other, more useful exceptions (such as payment of a dividend or the allotment of bonus shares). 101 There are proposals for abolition of the prohibition for certain private companies but at the moment the principle applies to public and private companies alike. 102 Private companies are able, however, to “whitewash” financial assistance if they go through a bureaucratic and cumbersome procedure which involves the giving of a statutory declaration as to solvency over the next 12 month period by the directors backed up by an auditors’ report which confirms that the auditors have considered the declaration and are not aware of any reasons why the declaration would be unreasonable. 103 In addition auditors special resolutions are required to show that the members concur with the directors on this point.

5.

The Shareholders

a)

Rights and Duties of a Shareholder

104 The fundamental right of a shareholder is to participate in the assets and profits of the company, either on a capital basis (on a winding-up) or on an income basis (through the receipt of dividends). Each share represents a capital payment to the company. That capital payment falls to be repaid on a winding up subject to payment of all debts and obligations.

48 49

74

CA section 153. [1989] AC 755.

Jeff McGeachie

5. The Shareholders

England

105

In addition, the shareholders, as owners of the company, are entitled to delegate man- 105 agement to the Directors. It is important to understand that the Courts do not seek, and are not entitled (other than in certain limited exceptions) to overturn the exercise of this delegated power by the Directors. The shareholders are able, if all else fails, to vote out any directors50 on a majority vote 106 at a meeting called on special notice. Any exercise of this right cannot be expressly curtailed by private agreement or in the Articles but there are mechanisms which can be deployed to produce a similar result where necessary. Any director affected by a Section 303 notice has the right to circulate members with a 107 notice contesting the process.51 b)

Dividend Rights

If a company makes a payment to the members or in any way transfers assets to 108 members, then such a payment or transfer constitutes a “distribution”.52 It is generally the function of the members in general meeting to authorise the payment 109 of a dividend by way of ordinary resolution. This would be the normal provision in the Articles of Association but subject to an additional proviso that the amount declared cannot be greater than the amount recommended by the directors. The Articles should always be checked on this. However, most Articles of Association then leave it open for the directors to declare what is known as an “interim” dividend. The Articles would also normally contain a provision allowing for payment by way of 110 the distribution of non-cash assets “in specie”. A company cannot make distributions to members unless it has “distributable assets” at 111 least equal to the proposed amount of the distribution.53 This is a by-product of the maintenance of capital rule. There are exceptions such as the issuing of bonus shares, the redemption of shares, Court-sanctioned reductions of capital or distributions on a winding-up. The key question therefore is the calculation of “distributable profits”. These are de- 112 fined as “accumulated realised profits ... less accumulated realised losses”.54 These are obviously terms of accounting which are open to debate. Profits must be realised which means turned into cash or, if not realised then realisable into cash with reasonable

50 51 52 53 54

CA CA CA CA CA

section section section section section

Jeff McGeachie

303. 304. 263(2). 263(i). 263(3).

75

113

England

II. Private Limited Companies and PLCs

certainty. Realised profits cannot be counted twice by being capitalised first and then used to form the basis for a dividend calculation. Similarly realised losses do not fall within the calculation if they have already been written off in a reduction or reorganisation of capital. 113 A public company can only make a distribution if it has distributable reserves and its net assets amount is not less than the aggregate of called up share capital and undistributable reserves. In addition payment of the dividend must not take the net asset figure below the minimum aggregate amount. The reality of this means that public companies (unlike their private counterparts) need to factor in any unrealised capital losses. Undistributable reserves include the share premium account and the capital redemption reserve.55 114 The next issue after defining distributable profits is to come to a view on the amount of such profits that are available. In order to determine this amount, the “relevant” accounts need to be referred to.56 115 In most cases the “relevant” accounts will be the last annual accounts (i.e. those accounts laid before the members in accordance with CA section 241). It is possible to rely on interim accounts if these would support a distribution in circumstances where the last annual accounts would not. However interim accounts need to be prepared to a standard which is similar to the standard required of the last annual accounts. c)

Rights of minority shareholders

116 The central propositions that apply when it comes to analysing the rights of shareholders aggrieved at the way a company is conducting its affairs are as follows: (i) the wishes of the majority should prevail in general; (ii) the shareholders are assumed to have delegated management to the directors; and (iii) the court will not generally interfere in the internal affairs of a company – if a wrong has been done to a company it is the company that must take action. 117 These are the basic propositions that arise from generations of cases, most notably Foss v Harbottle.57 118 The practical effect of this rule is that if a shareholder has a minority holding and is of the view that a wrong has been done his ability to require the company to act in the face of opposition from the majority is extremely limited. 119 The Companies Act provides some statutory controls, most notably section 459 being the right not to be unfairly prejudiced or section 122 IA which provides that the court may order a “just and equitable winding up” in certain circumstances. In addition where

55 56

CA section 264(3). CA section 270.

57

[1843] 2 Hare 461.

76

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5. The Shareholders

England

120

changes are proposed to the objects clause members holding 15% or more of the votes at a general meeting of the company can apply to the court for an order prohibiting or varying such proposals.58 Similar rights apply in respect of proposals to vary or abrogate any class rights (sections 120 125 and 127 CA). The Court does not wish to be involved in internal disputes or open the gates to a 121 multiplicity of claims. In addition the view is that loss caused simply as a result of a fall in value of shares is a very difficult issue for a court to be asked to adjudicate on.59 d)

Exceptions to the rule in Foss v Harbottle

That said, certain exceptions to this doctrine have been developed in the common law 122 over the years to ameliorate what would otherwise be a harsh rule. Those exceptions were set out most clearly in Russell v Wakefield Waterworks Co.60

123

The exceptions are: (i) ultra vires or illegal acts; (ii) fraud on the minority; (iii) the denial of individual membership rights; and (iv) actions designed to require the company to adhere to special procedures or pay heed to specified majorities for actions. It was noted above at # 22 that the ultra vires doctrine has been abolished so the first 124 exception really now applies only to illegal acts of the company if the remedy sought is to prevent a future act or set aside a previous act. However if the remedy sought is to make directors personally liable for loss then the common law ultra vires doctrine can still apply.61 Fraud on the minority arises as a result of the court’s desire to ensure that legitimate 125 cases are not blocked. In Atwool v Merryweather 62 the allegation was that directors, in forcing through an acquisition by the company, had made a secret profit. The minority shareholders needed to be able to litigate in the company’s name to ensure that the directors were held to account and the transaction set aside. This core principle would also apply if the act were an act of the majority of share- 126 holders and not the directors.

58

CA section 5.

59

(Stein v Blake [1998] BCC 316). [1875] LR 20 Eq 434. Smith v Croft (No 3) (1987) 3 BCC 218. [1867] LR5 Eq. 494.

60 61 62

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127

England

II. Private Limited Companies and PLCs

127 Any action launched by a member to enforce a cause of action vested in the company is called a “derivative” action. 128 The “exception” which arises where there has been a denial of individual membership rights is not really an exception. The right alleged to have been compromised is a right of the member in his capacity as a member and not a right of the company itself which is not being enforced. e)

Companies Act Section 459

129 Section 459 gives a shareholder who believes that the company’s affairs are being, or have been, conducted in a manner which is unfairly prejudicial to the members generally or some part of the members, the right to petition the Court for an order. The Court can make an order in whatever terms it likes, but as a practical issue will generally seek to resolve shareholder disputes through some form of buy-out mechanism. 130 The benefit of the section 459 protection is that it avoids the difficulties as to standing to sue which were generated out of the rule in Foss v Harbottle. It also provides a more flexible remedy than the old “just and equitable” remedy that applied. However, the basic requirement is that the conduct or act be regarded as “unfair”. This is a difficult concept to pronounce on and clear guidelines are difficult to produce. Examples of unfair conduct have been found to be as follows: 131 taking excessive management fees; 132 improper allotment of shares;63 133 diverting business opportunities;64 134 the issue of a misleading circular;65 and 135 the exclusion from management of a shareholder in breach of an undertaking to the company (R+H Electrical Ltd v Hader Bill Electrical Ltd66). 136 At heart the action must relate to the affairs of the company and be prejudicial and unfair. It need not be unlawful but must relate to the members generally. f)

Meetings of Shareholders

137 There are three types of shareholder meetings: (i) annual general meetings (AGM); (ii) extraordinary general meetings (EGM); and 63 64 65 66

78

(Re DR Chemicals Ltd (1989) 5 BCC 39). (Re London School of Electronics Ltd (1985) 1 BCC 99). (Re a Company (1986) 2 BCC 99). [1995] BCC 958.

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5. The Shareholders

England

138

(iii) general meetings. An EGM differs from a general meeting in terms of the business to be conducted and the 138 notice period required for that business. CA Section 366 sets out the requirement that at least once in every year the company 139 will hold a meeting of shareholders and that that meeting shall be the AGM.

An AGM must be held within 18 months of incorporation. This means that there may 140 not be an AGM in the calendar year or subsequent year of incorporation. No more than 15 months must elapse between each AGM.

141

Private companies, where all of the shareholders concur, can elect to dispense with the 142 need to hold AGM’s.67 Any shareholder who disagrees with this has the right to require, in certain circum- 143 stances, that an AGM be held. If no AGM is held and no election to dispense with the AGM made, the Secretary of 144 State, following an application by a member, can require that an AGM be held.68 Shareholders holding together shares carrying ten per cent. of the votes at a general 145 meeting, are able to require the company to hold an extraordinary general meeting of shareholders. If the Directors fail to abide by this requisition, those shareholders or at least those of them accounting for half of the votes of all of the requisitionists who have issued the notice can convene the meeting themselves.69 g)

Notice

The Articles will state the notice period required for meetings of the shareholders. That 146 said, the general rule is that at least 21 days’ notice in writing is required for the AGM and 14 days for any other general meeting (except a general meeting where a special resolution – see # 155 below – is to be put to the members). The members (unanimously in the case of an AGM and by the requisite majority 147 (effectively 95 per cent. of the votes that can be cast in the case of other meetings)) are able to waive these minimum periods.70 Additionally, the 95 per cent. majority can be reduced, in the case of a private company, 148 to 90 per cent. by way of an elective resolution.

67 68 69 70

CA CA CA CA

section section section section

Jeff McGeachie

366A. 367. 368(4). 369(3).

79

149

England

II. Private Limited Companies and PLCs

149 As with extraordinary general meetings, shareholders can require general meetings to be held if they account for ten per cent. of the votes (excluding Treasury shares) that can be cast at meetings of members. h)

Proxies

150 Any shareholder entitled to attend and vote at a meeting is entitled to appoint a proxy to attend and vote in his place.71 That right also extends to a right to speak if the company is a private company. 151 This right to appoint a proxy needs to be clearly set out in the notice convening the meeting. Any officer in default of this provision is liable to pay a fine. i)

Votes

152 Votes are normally conducted by a show of hands, but five members (having the right to vote) or members holding ten per cent. of the shares carrying the right to vote may demand that the votes be cast in writing and fully counted. This is called a “poll”. j)

Corporate Representative

153 A corporate representative is the person properly appointed by a company which is itself a member of another company to attend and vote on its behalf at meetings of that other company.72 k)

Resolutions

154 Members accounting for five per cent. of the votes capable of being passed at a general meeting are entitled to require that a particular resolution be put to a meeting,73 together with a short statement of not more than 1,000 words explaining the resolution. l)

Extraordinary and Special Resolutions

155 An extraordinary resolution is one that must be passed by a majority of 75 per cent. of the members entitled to attend and vote. A special resolution requires the same majority but is one where at least 21 days’ notice has to be given (Special Notice) and the resolution submitted to members makes it clear that the intention is to put the resolution as a special resolution.74 156 An ordinary resolution is one where a simple majority (more than 50 per cent.) is required.

71 72 73 74

80

CA CA CA CA

section section section section

372. 375. 376. 378.

Jeff McGeachie

6. The Directors

m)

England

157

Elective Resolutions of Private Companies

Some of the more bureaucratic rules imposed by the legislation can be varied or dis- 157 pensed with by private companies if they follow what is known as the elective procedure. These include the need to hold an AGM, or the need to appoint auditors on an annual basis.75 If the elective procedure is to be followed a resolution passed by all members entitled to 158 attend and vote must be passed at a meeting to which 21 days’ notice has been given (except where all members agree to accept shorter notice).76 Special extraordinary and elective resolutions must be filed at Companies House.77 n)

159

Written Resolutions

All the members entitled to attend and vote (or as regards resolutions to be put to 160 specific classes only of shareholders, all of the members of that class) can effectively pass a resolution by signing a written resolution, thereby dispensing with the formalities of a meeting.78 The process for written resolutions also requires that a copy of the proposed resolution 161 be supplied in advance or at the same time as it is supplied to members, to the auditors.79 The proceedings of meetings need to be recorded in minutes which in turn are to be 162 inserted in the company’s statutory register. All members are entitled to inspect these minutes free of charge. 80

6.

The Directors

a)

Number of Directors

A private company may operate with only one director81 (although the Secretary has to 163 be a different person).82 In CA section 286 there is set out a requirement for the secretary of any public company 164 to hold a minimum level of qualification for the task. This by and large means someone 75 76 77 78 79 80 81 82

CA CA CA CA CA CA CA CA

section section section section section section section section

Jeff McGeachie

379A. 379A(2). 380. 381A. 381B. 382. 282. 283.

81

165

England

II. Private Limited Companies and PLCs

who has previously held the position of secretary at another public company, or is a solicitor or barrister, or a member of one of the Institutes of Chartered, Certified or Management Accountants, or someone who the directors believe has the necessary skill to carry out the function as a result of previous experience. 165 Every person appointed as a director needs to complete and sign the appropriate form in which he consents to act as a director. This form [form 288] is then filed (within 14 days of appointment) at Companies House. Details of each director and the Secretary are noted in the relevant register in the company’s books. These registers can be inspected free of charge by members and for a small fee by any other person.83 166 It is not a statutory requirement that a director own shares in the company but a requirement can, however, be inserted in the Articles of Association. Any appointment of a director at a vote of members in general meeting shall be voted on, on an individual basis. 84 167 A person cannot be appointed as a public company director if he is 70 or over unless the members approve such appointment at a meeting convened on special notice. There is no maximum age for a director of a private company. 168 Furthermore, a director must vacate the office at the end of the first annual general meeting after his 70th birthday. 85 169 A director can appoint an alternate, but only if that power is set out in the Articles. Any such appointment can be indefinite or for some specified period of time or a set number of board meetings. b)

Resolution to remove director

170 A company may by ordinary resolution remove any director provided that special notice has been given of the resolution. 86 171 The company cannot agree that that it will not implement such a resolution and any removal under section 303 will not remove the affected director’s rights to seek damages for breach of contract. 172 The director in question has a right to be heard at the relevant meeting of members and make representations to members in writing which must, if not provided too late, be circulated to members before the meeting. 87

83 84 85 86 87

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section section section section section

288(3). 292. 293. 303. 304.

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6. The Directors

c)

England

173

Other provisions

If a company wants to state the name of any director on company correspondence, it 173 can only do so if the names of all directors are set out legibly.88 The directors are required by CA section 309 to have regard to the interests of employ- 174 ees as well as shareholders. A company currently cannot indemnify its directors or auditors against any liability for 175 negligence, default, breach of duty or breach of trust. It is possible to pay costs incurred in successfully fighting off such an action. It is also possible to purchase appropriate liability insurance.89 There are proposals to revise section 310 to permit indemnification against liabilities to 176 third parties and to broaden the ability to pay legal costs to include situations where the company is the plaintiff subject to an obligation to repay if the defence is unsuccessful. d)

Fair Dealing

The directors cannot be paid any remuneration on a tax-free basis. 90

177

A company cannot make a payment to a director of compensation for loss of office or on 178 retirement (either as a single transaction or as part of a broader transfer of all or part of the undertaking or property of the company) without having that payment approved by the members.91 If there is a transfer of all or some shares in the company following an offer to share- 179 holders, then it is a director’s duty to ensure that any payments to him of compensation for loss of office or on retirement are properly disclosed to members as part of the offer process. 92 e)

Directors’ Fixed Term Contracts

If it is proposed that a director enjoy the benefit of a fixed term (i.e. not determinable 180 on notice) employment contract of more than five years’ duration, then that provision needs to be approved by the members. This also applies where the director is an employee of the company’s holding company.93

88 89 90 91 92 93

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section section section section section section

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305. 310. 311. 312. 314. 319.

83

181

England

f)

Substantial Property Transactions

II. Private Limited Companies and PLCs

181 Any arrangements under which a company buys from, or sells to, a director, property of the “requisite value” is void unless approved by a resolution of the members. 182 The current requisite value (as at the date of publication of this edition) is the lower of £ 100,000 or 10 per cent. of the company’s asset value (subject to a floor of £ 2,000). 183 There are various exceptions to this rule in CA section 321, mainly centred on intragroup disposals or where the director is also a member and the transfer is to him in his capacity as a member. 184 The following section also renders voidable at the insistence of the company any transaction undertaken where the directors have exceeded any limitations on their authority. g)

Directors’ Duties – Proposals for Change

185 The broad position is that the nature and scope of the duties owed by directors to a company are set out in case law rather than in statute. The Government (in a white paper dated July 2002) has indicated a desire to set out and codify these duties. This desire was reiterated one year later and on 26 May 2004 a consultation paper was issued giving details of relevant proposals currently expected to be inserted in the new Companies Bill. h)

Loans to Directors

186 Section 330 CA states that a company cannot make a loan to a director or provide security or a guarantee for a loan by a third party to that director. In addition there is a prohibition on a public company or another company within a public company’s group making a loan or a “quasi loan” (essentially paying off a director’s borrowings) to a director or a person connected with a director. Loans or quasi loans not exceeding £ 5,000 are not subject to the prohibition. i)

Who is Liable as a Director?

187 It is possible for a person to incur liability as a director even if he has not been formally appointed. This would occur if he was a de facto director or a shadow director. 188 A shadow director is a person “in accordance with whose directions or instructions the directors are accustomed to act”. 94 A substantial number of the obligations under the Companies Act are imposed on shadow directors such as CA 317 (disclosure of interests) or CA 319 (service contracts for no more than five years). One of the issues that often arises relates to certain commercial relationships (such as the bank relationship or

94

84

Section 741(2) CA.

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6. The Directors

England

189

the position with certain consultants). There may be circumstances where a bank directs the affairs of its client to such an extent that it becomes possible to assert that a shadow directorship has arisen.95 A de facto director behaves like and assumes the outward mantle of a director even 189 though he has not been properly appointed. A shadow director is someone who has avoided appointment and has not sought to appear as a director. The concept of de facto directors is one that has been developed by the common law. j)

Director’s authority to bind the company

An issue often arises as to the extent to which a third party dealing with a company is 190 obliged to investigate the internal processes of the company. One would normally expect any third party to be vigilant to assure himself that the person he is dealing with has authority. In Royal British Bank v Turquand96 the rule was formulated that if a person was acting in 191 good faith he was not obliged to inquire into the internal management of the company. This is known as the rule in Turquand’s case. If the person has express knowledge that the internal processes have not been complied with then even if he is acting in good faith, the rule does not apply. k)

Fiduciary Duties

A director is required to act in good faith in the best interests of the company. This is a 192 duty owed to the company but it is measured by reference to the short-term as well as the long-term interests primarily of the shareholders (but also the employees97). The court will not impose its own view of what should have been done if it accepts that the director had the best interests of the company at heart. Examples of bad faith include the sanctioning of salary payments to a director’s wife even though she was ill and unable to work and a director’s entry into a new service contract in circumstances where it was clear that the director was giving no thought at all to the company’s interests. 98 A director must not act in a way that exceeds the powers conferred on him by the 193 Memorandum and Articles of Association of the company. This would include causing the company to do something forbidden by its constitution as well as acting for an improper purpose (e.g. to protect his own position). A director must not fetter his own discretion (although if the fetter is contained in a bona fide commercial contract it may be enforced) and must avoid conflicting interests and conflicting duties. If he acts in contravention of this rule, the likelihood is that he will be required to account to the company for any profit made. This applies even if there is no allegation that the company has lost a specific opportunity. 99 Allied to this is the duty not to make an 95 96 97 98

Re A Company [1985] 4 BCC 424. (1856) 25 LJQB 317. Section 309(1) CA and Smith v Fawcett Ltd [1942] CH 3040. Re WRM Roith Ltd [1967] 1 WCR 432.

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85

194

England

II. Private Limited Companies and PLCs

unauthorised profit unless that personal profit was authorised by resolution of the members or in the Articles of Association. l)

Duty of Confidentiality

194 When assessing the duties of directors a distinction needs to be drawn between those duties which require a director to behave honestly and with integrity (the fiduciary duties discussed above) and those duties which are about competence and the following of correct processes (the duty of skill and care discussed below as well as those duties that arise on or around insolvency). m)

Duties of Skill and Care and Diligence

195 There are essentially two tests that apply in relation to competence and the director has to satisfy the most onerous. The first test is an objective test which asks what a reasonable and diligent person having the skills to be expected of someone holding that position would have done. 196 The second is a more subjective test which asks whether the conduct of the director matched the conduct to be expected, bearing in mind the specific talents and skills of that particular director.100 In addition the law requires directors to give a reasonable amount of attention to the company. This does not mean attending on a daily or other set basis. In order to prove that a director has not been diligent it is obvious that the plaintiff will need to have a clear idea of what could and should have been done but was not and what the benefit would have been if it had been done.101 n)

Directors’ Duties On Insolvency

197 The Insolvency Act contains at sections 206-208 a series of rules designed to ensure that Directors who falsify profits or fraudulently remove or conceal property are subject to criminal prosecution. The specific rules apply in relation to any such fraudulent acts within the twelve months that precede winding up. If the acts can be demonstrated to have been done to defraud creditors then the relevant period is five years. 198 In addition there are specific provisions at sections 213 and 214 of the IA which deal with the conduct of business prior to winding up. Section 213 provides that the liquidator may seek to recover money from officers who have caused the company to engage in fraudulent trading.

99 100 101

86

See Re: Bhullar Brothers Limited [2003] EWCA CIV 424. See Benfield Greig Group [2001] BCC 92. Re Simmon Box (Diamonds) Ltd; Cohen v Selby [2002] BCC 82.

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6. The Directors

England

199

Section 214 provides for recovery in the case of wrongful trading. The difference is that 199 section 213 applies where there has been a high level of dishonesty (e.g. the continued running up of trading debts in the certain knowledge that they would not be repaid.102 Wrongful trading applies if the company has gone into insolvent liquidation and at 200 some point prior to this a director knew or ought to have known that there was no realistic possibility of insolvent liquidation being avoided. o)

Directors’ Disqualification

The basic legislation governing disqualification of directors is set out in the Company 201 Directors Disqualification Act 1986 (“CDDA”). This has been qualified to a limited extent by the Insolvency Act 2000 in that an undertaking having the same effect as a disqualification order can be accepted by the Secretary of State. This saves both time and money. Disqualification is an issue that affects directors who: (i) engage in misconduct; (ii) are not fit to be directors; and (iii) fall within other specified categories.

202

Misconduct takes many forms as set out in CDDA sections 2-5 including conviction for 203 an indictable offence, persistent breach of companies legislation and fraud. There is a general statutory presumption in CDDA section 3(1) that three defaults in a five year period is misconduct. Unfitness is a more subjective test and can arise after insolvency103 or after an inves- 204 tigation of the company’s affairs.104 The third category applies to directors who have engaged in fraudulent or wrongful 205 trading or who are undischarged bankrupts. There is also a new provision in the Enterprise Act 2002 at section 204(2) which opens the possibility of disqualification for breach of competition legislation. The court has discretion in most cases as to whether or not to make an order. The court 206 is bound to disqualify where there has been a CDDA section 6 finding of unfitness or a breach of competition legislation. The court can also make orders giving certain permissions including leave to remain as a director of a named company or leave to continue in some management, but not director, capacity (but see # 208 below). The order must state a maximum and/or minimum period of duration.

102 103 104

207

Re William (Leitch Brothers Ltd [1932] 2 Ch 71). CDDA section 6. CDDA section 8.

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87

208

England

II. Private Limited Companies and PLCs

208 Notwithstanding the possibility of a special permission being granted (in # 206 above), one of the fundamentals of an order is the prohibition against being concerned in management. This really means “managing the affairs of the company”.105 The question is one of fact in each case. p)

Disclosure of Information relating to Directors

209 CA section 288 requires the company to maintain a register of the directors and the secretary. It also requires that the Registrar of Companies be notified of the details of each new director and any change to their details within 14 days. These details are then made available to the public (unless a CA section 732 B-F confidentiality order is made). 210 A confidentiality order (most recently sought by a US businessman seeking to take over Manchester United PLC) is granted if there is a serious risk of harm or violence if details of the residential address of a director are made publicly available. 211 If a company wants to state on its correspondence the name of one director it must state the names of all directors. 212 It is not often fully appreciated, but a copy of each director service contract or a summary of its terms must be kept at the registered office of a company106 and must be made available free of charge for inspection by any member. 213 There are various provisions dealing with disclosure of interests in shares or debentures. The fundamental duty is set out in CA section 324. The obligation is to disclose the extent of any interest in shares or debentures of the company or any subsidiaries or the holding company or other associated companies. 214 The accounts must contain details of emoluments paid to directors,107 persons connected with directors and any officers other than directors. 215 There are of course substantial provisions dealing with the disclosure of share dealing activity as well as restrictions on such activity by directors of listed companies. These obligations are complex and are set out, in the main, in the Listing Rules.

7.

The Accounts and Audit

a)

Basic Requirements

216 The basic requirement relating to accounts is contained in CA section 221. The requirement is for the company to keep records at all times which disclose the company’s 105 106 107

88

Re B Johnson & Co (Builders) Ltd [1955] CH 634. CA section 318. CA section 232.

Jeff McGeachie

7. The Accounts and Audit

England

217

financial position with reasonable accuracy. These records must enable the directors to prepare, when required, a balance sheet and profit and loss account which conform to the requirements set out in the Act. In particular there must be book entries in relation to all monies paid or received as well as a record of assets and liabilities. The Act also makes it compulsory to stock-take where the business of the company 217 involved is dealing in goods. A private company is required to obtain accounting records for three years from the 218 date they are made. The equivalent period for public companies is six years.108 Failure to keep adequate accounting records renders the officers liable to a fine. b)

219

Financial Year and Accounting Reference Period

The concept of the financial year and the accounting reference period underpin the 220 accounting rules in that they provide a framework for the preparation of accounts on a consistent and timely basis. It is important to understand that the concepts of the financial year and the accounting reference period are linked. In particular, the financial year is determined by reference to the accounting reference 221 period. The first financial year starts on the first day of the first accounting reference period and 222 ends on the last day of that period (or within seven days on either side109). The accounting reference period is determined by the accounting reference date. In most cases the accounting reference date is the last day of the month in which the 223 anniversary of incorporation falls.110 However, the first accounting reference period is the period starting on incorporation 224 and ending on a date at least six months after incorporation and at most 18 months after incorporation.111 The accounting reference period can be lengthened or shortened by notice on the 225 appropriate form.112

108 109 110 111 112

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section section section section section

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222. 223. 224(5). 224. 228.

89

226

England

c)

Balance Sheet and Profit and Loss Account

II. Private Limited Companies and PLCs

226 For each financial year the directors must prepare a balance sheet as at the last day of the financial year and a profit and loss account.113 227 The Balance Sheet must give a true and fair view of the state of affairs of the company and the same standard applied as to profits and losses is demanded of the profit & loss account. 228 The form and content of the accounts is set out in Schedule 4 of the Act. 229 The directors of a parent company are required to prepare group accounts comprising a consolidated balance sheet and profit & loss account.114 Group accounts must be in the form set out in Schedule 4(a) to the Act. 230 The accounts must be approved by the directors and signed on the Balance Sheet by one of their number.115 A copy must be delivered to Companies House. d)

Responsibilities of Directors

231 All directors who are party to approving inaccurate accounts and who know they are inaccurate or are reckless as to accuracy are liable to a fine.116 232 The directors are also required to prepare a report containing a fair review of the financial year as well as the recommendation, if any, on payment of a dividend. The report has to comply as to format and contents with the requirements set out in Schedule 7 of the Act. 233 The report has to be approved by the directors and signed by one of their number.117 It must be delivered to Companies House. The auditors, in turn, have to certify in a report that they prepare, that the accounts have been properly prepared and set out a true and fair view, in relation to the balance sheet and the profit & loss account.118 234 The auditors’ report must be circulated to members and a copy delivered to Companies House. 235 Every member, every debenture holder and any person entitled to receive notice of general meetings of the company has a right to receive a copy of the accounts, directors’

113 114 115 116 117 118

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section section section section section section

226. 227. 233. 233(5). 234. 235.

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7. The Accounts and Audit

England

236

report and auditors’ report119 not less than 21 days before the date of the meeting at which copies of those documents are to be laid. It is also obligatory for a company at any time to respond to a demand for a copy of the 236 last accounts or relevant reports.120 The directors must, in respect of each financial year, lay the accounts and relevant 237 reports before the members in general meeting. Failure to abide by this obligation renders each director liable to a fine.121 e)

Period for laying of accounts

A private company has to lay accounts before members within 10 months of the end of 238 the relevant accounting reference period. The period for a public company is seven months. There are a couple of caveats to this. If the accounting reference period is the first 239 such period and is a period greater than 12 months, then the 10 month /seven month clock starts ticking on the anniversary of incorporation. Alternatively, if the relevant reference period plus three months produces a longer time frame, then this timeframe will prevail.122 If the accounting reference period has been shortened then the 3 months period referred 240 to above will commence from the date of the notice. The directors can revise the accounts. In addition, the Secretary of State has power to 241 investigate the accuracy of accounts and make an application to the courts for an order for the auditing of the accounts or revision of those accounts. f)

Small companies

Section 246 of the Act provides that the accounts and reports to be prepared by com- 242 panies qualifying as “small” companies can be abbreviated in certain significant ways. These changes include the provision of aggregate as opposed to individual numbers in certain circumstances. The obligation to deliver certain items to Companies House is considerably reduced (amounting basically to a short-form balance sheet). There is a similar, but slightly more onerous regime for certain “medium-sized” com- 243 panies.123

119 120 121 122 123

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section section section section section

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238. 239. 241. 244. 246A.

91

244

England

II. Private Limited Companies and PLCs

244 A company qualifies as a small company if any two of the following three conditions are met: (i) turnover of not more than £ 5-6 million; (ii) balance sheet total of not more than £ 2.8 million; and (iii) no more than 50 employees. 245 The figures for qualifying for medium-size status are £ 22.8 million, £ 11.4 million and 250 employees. 246 It is important to note that these provisions are not applicable in respect of public companies, companies carrying on an insurance business or businesses regulated under part 4 of FSMA.124 247 Where abbreviated accounts are proposed to be delivered to Companies House, they must be accompanied by a special report from the auditors certifying that the company is entitled to prepare abbreviated accounts and that the accounts in question have been properly prepared.125 Where such a report is delivered it is not a requirement that the fuller form auditors’ report be filed as well. 248 Finally, it is possible for certain small companies to be exempted totally from the audit requirement. This exemption has effect mainly in relation to companies operating as charities.126 249 A public company whose shares or debentures are listed is not required to send accounts and reports to “entitled persons” (shareholders, debenture holders or others entitled to receive notice of general meetings) but can fulfil its obligation to inform by sending a summary of financial information or directing entitled persons to a website where such a summary can be accessed.127 The form and content of such summaries is set by the Secretary of State. g)

Elective Resolution Procedure

250 A private company can elect (by elective resolution in accordance with CA section 379A) to dispense with the laying of accounts and reports128 before a general meeting of members. This is subject to the right of shareholders to require a meeting for this purpose, a right shareholders or indeed the auditor should be expressly reminded about when the company sends out the report and accounts to members.

124 125 126 127 128

92

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section section 249A. section section

247A. 247B. 251. 252.

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8. Auditors

England

8.

Auditors

a)

Basic Requirements

251

Every company is required to appoint an auditor or auditors,129 subject to certain limited 251 exemptions. Auditors must be appointed at a general meeting of members at which accounts are laid 252 (unless an election to dispense with such a meeting under CA section 385A is in place).130 Where an election is in place, an appointment of auditors must be made at a general 253 meeting within 28 days of the reports and accounts being sent to members. b)

Elective Resolution

It is possible for a private company to elect not to appoint auditors annually.131 Certain 254 small companies are exempt from the requirement to appoint auditors at all132 provided they satisfy the conditions for exemption from auditing accounts. c)

Rights of Access

The auditors have rights of access to the company’s books, accounts and vouchers and 255 can require the directors and officers to provide such information and explanation as is necessary to enable them to carry out their duties under the Act.133 d)

Provision of Misleading Information

The provision of misleading, false or deceptive information is an offence.134 e)

256

Attendance at General Meetings

The auditors are also entitled to receive notice of and attend general meetings and be 257 heard at any meetings where matters relevant to them as auditors are to be discussed.135

129 130 131 132 133 134 135

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section section section section section section section

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384. 385. 386. 388A. 389A. 389A(2). 390.

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258

f)

England

II. Private Limited Companies and PLCs

Remuneration

258 The remuneration of auditors appointed at a general meeting is fixed at a general meeting or in such manner as the company in general meeting may determine.136 259 The amount of remuneration (including expenses) is to be declared in a note to the accounts. 260 The Secretary of State also has room to extend this requirement of disclosure to the amounts paid to the auditors or their “associates” for non-audit work.137 g)

Removal of Auditors

261 A company can always remove its auditors by way of ordinary resolution notwithstanding any provision to the contrary in the agreement for audit services entered into by the company.138 The Registrar of Companies must be informed within 14 days of the removal. Any resolution to remove an auditor before the expiry of his term of appointment can only be passed at a meeting convened on special notice. The auditors have the right to make representations and the company is required to copy shareholders with these representations.139 262 In certain circumstances the representations have to be read out at the meeting. The court is able to declare following an application by members that the right to make representations is being exercised in an abusive manner. 263 Auditors can resign by notice to the company140 but if they do so they must file a statement.141 The company must send a copy of the notice to the Registrar of Companies within 14 days of receipt.

9.

Registration of Charges

a)

Registration Requirements

264 If a company creates a charge by way of security and that charge is one to which part XII of the Act (Registration of Charges) applies, then the charge must be registered at Companies House within 21 days after the charge’s creation.142

136 137 138 139 140 141 142

94

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section section section section section section section

390A. 390B. 391. 391A. 392. 394. 395.

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10. Arrangements and Reconstructions

England

265

The types of charges which are relevant for this purpose are listed in section 396 and 265 include charges on land, book debts, floating charges and intellectual property. Failure to register a charge within the required time frame renders the security void 266 against a liquidator or administrator or any creditor. b)

Maintenance of Register

Every company is required to maintain a register of charges at its registered office.143 267 Creditors and members can inspect the register during business hours free of charge. Other parties can be required to pay a nominal fee.

10. Arrangements and Reconstructions a)

Compromise Arrangement

It may be the case that a company has to reach a compromise arrangement with all or a 268 particular class of its creditors, or with all or a particular class of its members. Section 425 of the Act provides that such a deal, if sanctioned by the court and approved by three quarters of the creditors (or class of creditors) or members (or class of members) as relevant, can be imposed. Copies of the Court’s order must be registered at Companies House and attached to every copy of the memorandum. CA section 426 requires that the notices convening the relevant meeting must con- 269 tain a statement detailing the proposal, the specific effects on particular classes of members and/or creditors together with a description of the material interests of directors (whether as directors, members or creditors).

b)

Reconstructions

CA section 427 applies when a specific proposal seeks to combine a compromise with a 270

reconstruction under which all or substantially all of the assets of the company are to be transferred to another company. The section effectively grants the court the ability to make such order as to allotment of shares or transfer of assets or liabilities as is required and applied for.

11. Takeovers and Compulsory Acquisitions of Minority Shareholders a)

Compulsory Acquisition

If a takeover offer is made (defined in CA section 428 as an “offer to acquire all the 271 shares in a company or all of the shares of a particular class on terms which are the same

143

CA section 407.

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95

272

England

II. Private Limited Companies and PLCs

in relation to all such shares”) it will be possible having secured acceptance of the offer in respect of 9/10ths of all the shares (or class of shares as relevant) to compulsorily acquire any balance. b)

Conditions

272 The conditions are to send out a notice in the prescribed form together with a statutory declaration that all of the conditions to the offer have been met. The declaration must be signed by a director. 273 In section 430A a minority shareholder can require that its shares be bought out on the same terms by giving notice in writing to the company.

12. Investigation Of Companies and Their Affairs a)

Appointment at Request of Members

274 The company, or 200 members, or members holding not less than 1/10th of the issued shares, may ask the Secretary of State to appoint investigators to look into the affairs of the company. The Secretary of State may ask for some security for costs (not more than £ 5,000144). b)

Power of Court

275 There is a corresponding power for a court to order the Secretary of State to appoint investigators in CA section 432. The same section empowers the Secretary of State to investigate even without a court order if he suspects intent to defraud creditors or conduct unfairly prejudicial to members or if he thinks there is fraud, misfeasance, or other misconduct on the part of the founders or the company’s management. The investigators have extremely wide powers to compel the production of necessary documents or the cooperation of perhaps reluctant managers.145 Failure to cooperate can amount to contempt of court.146 c)

Investigation as to Ownership

276 There is an additional power for the Secretary of State to investigate the true position as to ownership of a company.147 There is also the power in section 444 to obtain information without the need to appoint investigators.

144 145 146 147

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section section section section

431. 434. 436. 442.

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13. Insolvency

England

277

The powers of investigators also extend to situations where it is believed that the 277 provision banning the dealing in share options by directors has been contravened.148

13. Insolvency a)

Introduction

The law relating to insolvency is extremely complex and it is impossible to provide 278 anything other than a brief sketch of the many procedures and concepts that underpin the law in this field. There are a few basic processes that need to be understood when trying to get to grips 279 with the law. These are as follows: (i) Voluntary Arrangements; (ii) Administration; and (iii) Winding-up (whether voluntary or by order of the court). In addition it is necessary to grasp the distinction between the various participants that 280 crop up from time to time in the various processes, as follows: (i) Administrators; (ii) Receivers and Managers; and (iii) Liquidators. Finally, we need to understand the duties of directors when a company’s finances and 281 trading raise concerns about continuing to trade. b)

Company Voluntary Arrangements

The CVA procedure in its more practical modern format (which allows for the possi- 282 bility in certain circumstances of a moratorium on enforcement of debts) is a procedure which allows a company to be given breathing space to deal with its financial problems with the concurrence of creditors. This can happen without resort to: (i) the bureaucratic processes of schemes of arrangements149 or schemes of liquidation and arrangement under section 110 IA; (ii) the more complex moratorium mechanics of administration; or (iii) the melt-down of receivership. That said, a CVA can be implemented even when the company is in administration or 283 in the throes of liquidation. It is only available in the form that includes a moratorium to “small” companies (as defined in CA section 247(3)) other than those small companies which are also “special purpose vehicles” (such as insurance companies).

148 149

CA section 323. CA sections 425-427.

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97

284

England

II. Private Limited Companies and PLCs

284 The provisions governing CVAs are set out in the Insolvency Rules 1986. The directors (or administrators /liquidators) make a proposal to the company and the creditors. That proposal nominates an insolvency practitioner to conduct the process. If the directors wish to obtain a moratorium on enforcement of debts the nominated insolvency practitioner must certify that in his opinion the proposal has a reasonable prospect of being implemented and that the company will have access to sufficient funds during the moratorium. The necessary documents are filed with the court and the moratorium is implemented for an initial maximum of 28 days. 285 At these meetings both sets of interested parties can approve the proposal (either with or without notifications). In the case of disagreement the will of the creditors prevails unless the court decides otherwise on application. 286 The result of the meetings is communicated to the court. If implementation is to proceed the IP becomes the “supervisor” and his job is to ensure that the deal, in effect an agreement to compromise debts, or put in place some other arrangement short of compromise, e.g. an extended moratorium, is properly managed and conducted. 287 The principal element of the procedure is the statement of affairs which is presented to the IP. This has to be a comprehensive document setting out in full all material facts relating to the assets and liabilities of the company. The IP is an officer of the court and has a special duty to satisfy himself that the information is correct and accurate to the fullest extent possible. The statement has to be certified as to its correctness by two directors or one director and the secretary. 288 The IP can request more information (including details of the activities in relation to other companies of current or former directors). 289 The IP gives the necessary declaration as to the likelihood of the CVA being implemented and all documents (the statement of affairs and the declaration) are then lodged with the court. The initial maximum 28 day moratorium then comes into effect where relevant. 290 As its name suggests, a moratorium is a period of relief from the enforcement of debts or security. 291 No winding up petition can be presented or winding up resolution passed. Similarly no petition for administration or appointment of an administrative receiver can be presented. Landlords cannot exercise any re-entry rights and no proceedings can be issued. 292 The supervisor must notify all creditors and members of completion of the CVA within 28 days of completion or termination. A report needs to be submitted as well summarising all payments and receipts. Any differences between the actual result obtained during the process and the results envisaged in the original proposal must be explained.

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13. Insolvency

c)

England

293

Administration

An administration order is an order directing that during the period for which the order 293 is in force, the affairs business and property of the company shall be managed by a person (“the administrator”) appointed for the purpose by the court.150 Administration was introduced in the Insolvency Act 1986(“IA”) and the above defi- 294 nition illustrates the original concept. The concept embodied the principle of a court-sanctioned devolution of power to 295 manage the company’s affairs to help it find a way out of financial difficulty. The problem with the original process was that it could be defeated by a floating charge 296 holder exercising the power to appoint an administrative receiver. A floating charge is a form of umbrella security over trading assets not specifically 297 allocated to a fixed charge. The idea is that on the happening of a specified event, the security “crystallises” and attaches itself to those trading assets caught within the umbrella at the moment of crystallisation. The Enterprise Act 2002 (introducing new Schedule 1B of the IA) has made two 298 fundamental changes: (i) a holder of a qualifying floating charge can no longer appoint an administrative receiver; and (ii) there is power in certain circumstances to commence administration without the need for a court order. The court in this scenario has a merely supervisory function. The new regime does not apply to prevent pre-2003 floating charge holders from 299 exercising their rights. The intention of the legislation is simply to make administration the first and not last or unlikely resort going forward. The administrator must be a licensed insolvency practitioner and he remains at all 300 times an officer of the court (even if there is no underlying order of the court). The administrator’s primary task is to rescue the company: (i) as a going concern; or (ii) if that is not possible obtain a better result for creditors; or (iii) in the final analysis conduct an orderly realisation of property in order that distributions may be made to secured or preferential creditors.

301

There (i) by (ii) by (iii) by

302

150

are three ways in which an administrator can be appointed: the court (on application of creditors, the company or directors); a qualifying floating charge holder out of court; and the company or its directors out of court.

IA 1986 section 8(2).

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99

303

England

II. Private Limited Companies and PLCs

303 If the court procedure is utilised then it will need to be shown that the company is unable to pay its debts and that the purpose of the order is likely to be achieved. 304 The holder of a floating charge which is not a qualifying floating charge cannot opt for an out of court administration. A qualifying floating charge is essentially a floating charge expressly incorporating Schedule 1B paragraph 14 and purporting to grant the power of appointment of an administrator. It must cover all or substantially all of the company’s assets. 305 One point to be noted is that (assuming standard wording) it is possible to exercise a right of appointment even in the absence of insolvency. This would of course be highly unusual. 306 A notice of appointment needs to be filed at the court together with the other prescribed documents (including a statutory declaration by the appointee that he holds a qualifying floating charge, a consent from the administrator are the administrator’s certification that he believes the object of the administration is likely to be achieved). 307 The company, either formally by ordinary resolution or by informal unanimous resolution, can appoint an administrator out of court. A similar power rests with a majority of the directors. 308 If the company has previously been in administration or a pre CVA moratorium came into being (with no subsequent CVA) or a CVA was terminated, the ability to appoint out of court is lost. There is a similar situation if a winding up petition has been presented or an administrative receiver is in place. 309 Any holder of a qualifying floating charge must be given at least five business days’ notice of intention to appoint. 310 An interim moratorium comes into being on the making of an application to court or the filing of a notice of intention to appoint. 311 For the duration of the administration following appointment there is a general moratorium on any form of legal action (such as action to enforce security or exercise rights of re-entry). 312 The two initial acts of the administrator should be to publicise the fact of his appointment and then as soon as reasonably practicable cause to be prepared and circulated a statement of affairs in relation to the company. This can be prepared by an employee. The statement must be certified as to truthfulness by the person preparing it. 313 The next step in the process is the initial meeting of creditors which must take place as soon as possible and by no later than ten weeks after appointment. This meeting can be dispensed with if there is no prospect of any payment to unsecured creditors or no prospect of a better return for creditors then would apply on a liquidation.

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13. Insolvency

d)

England

314

Voluntary Winding-Up and Compulsory Winding-Up

There are two questions which need to be addressed when deciding which procedure is 314 best suited for bringing a company to an end. The first question is whether or not the company is able to pay its debts and will, in the reasonable belief of the directors, still be able to pay its debts in a year’s time. The second question is the degree to which the history of the company and the 315 circumstances generally require the active intervention of the court. If the company is solvent and the directors are able to give what is known as a statutory 316 declaration to that effect, then a Members’ Voluntary Winding-up is the best option. If the company is insolvent but there is no need for an active role for the court then a 317 Creditors’ Voluntary Winding-up looks best. In other cases a compulsory winding-up is the best option. The procedure for a Members’ Voluntary Winding-up commences on the passing of a 318 special resolution (to be made within five weeks of making the necessary statutory declaration) whilst the procedure for a Creditors’ Voluntary Winding-up commences on the passing of an extraordinary resolution. In both cases, the resolutions acquire the approval of 75% of the members. Once the resolution is passed on a Members’ Voluntary Winding-up, a liquidator is appointed to collect in the assets, pay the creditors and distribute any balance to members. When the Creditors’ route is followed a creditors’ meeting has to be called within 319 14 days of the resolution being passed. However, very often it is held on the same day. Both Members and Creditors can appoint a liquidator and the creditors’ choice takes precedence if there is a difference. A full report on the company’s affairs has to be presented to the Creditors’ meeting. The compulsory winding-up procedure essentially involves the company being wound- 320 up by a court following on a petition to the court lodged by any of the company, the directors, the creditors and any contributories or by the Secretary of Stage or Official Receiver on the grounds of public interest. The process commences at the time of presentation of the petition, not the date of the 321 court order. If necessary the court can appoint a provisional liquidator to take control of the assets in the interim between the petition and hearing (which can sometimes be lengthy). There are a number of grounds for a petition but the most commonly used151 are that the company cannot pay its debts or the winding-up would in some way be just and equitable.

151

IA section 122.

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101

322

England

III. Limited Liability Partnerships

322 There is a statutory definition of the term “unable to pay its debts” (currently an unpaid debt of at least £ 750 even after the service of a statutory demand). The concept also covers failure to pay a judgment debt. 323 After presentation of a petition, no property of the company can be transferred and proceedings generally against the company have to be stayed. 324 It is possible however to continue to enforce security. 325 On the making of the order, the Official Receiver, a civil servant, becomes the liquidator. The creditors are able to bring in their own appointed liquidator and replace the Official Receiver.152

III. Limited Liability Partnerships 1.

Introduction

326 LLPs were introduced by the Limited Liability Partnership Act 2000 (“LLPA”). 327 They are intended to create a new form of corporate entity having an existence apart from its members and to give that new entity some of the features of a partnership (as governed by the Partnership Act 1980) (“PA”). In this regard LLPs have no capital requirements and members are free to share profits as they see fit and embody those provisions in a private document. An LLP does not have a Memorandum of Association or Articles. 328 The genesis of the creation of LLPs was that in many large scale (particularly property) transactions it was felt that a limited company vehicle was not suitable, possibly because of the maintenance of capital rules or because the tax consequences from using a vehicle with partnership characteristics were more favourable.

2.

LLP

329 An LLP is a body corporate with legal personality separate from its members.153 330 In addition, the laws applying to general partnerships (particularly the PA) do not apply to LLPs.154 Contracts are binding on the LLP in the same way as they would be binding on a company when signed by directors.

152 153 154

102

IA section 136(5). LLPA Section 1(2). LLPA Section 1(5).

Jeff McGeachie

3. Incorporation formalities

3.

England

331

Incorporation formalities

Two or more persons being associated with a view to making a profit must execute 331 incorporation documents.155 The requirement that the parties must associate with a view to profit is interesting as that is the standard formulation for a general partnership. This requirement means that certain not-for-profit organisations (such as some sports clubs) cannot utilise the LLP form. That the partners are associating with a view to a profit must be certified by a solicitor 332 or one of the founders.156 It is an offence to make a false declaration in this respect.157 The incorporation document (or a certified copy) must be delivered to the Registrar of 333 Companies.158 This requirement sets an LLP apart from a general partnership as there are no notification requirements for the latter. The incorporation form is similar in form and context to the incorporation of a limited 334 company. The name of the LLP has to be stated along with the registered office, the names and addresses of the persons who are to be members or incorporations and state that all members will be “designated” or identify which of the members will be designated. The concept of the designated member is discussed below at section 7.159

4.

335

Confidentiality

As with companies160 it is possible to apply to the Secretary of State for a Confidenti- 336 ality Order under which the requirement to give a residential address on the incorporation form is waived.161 When all the requirements have been satisfied a certificate of incorporation is issued.

5.

Commencement and cessation of Membership

On incorporation the members of the LLP are the persons stipulated on the form. New 337 members become members by and in accordance with the terms of the LLP agreement.162

155 156 157 158 159 160 161 162

LLPA section 2(1)(A). LLPA section 5.2(1)(c). LLPA section 2(3). LLPA section 12(1)(c). LLPA section 1(2). CA section 723B. LLPA section 2A. LLPA sections 4(1) and (2).

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338

England

III. Limited Liability Partnerships

338 Cessation of membership occurs in accordance with the terms of the LLP agreement. If the agreement is silent on cessation then reasonable notice must be given. It is unclear what this means but in a properly drawn agreement the issue should never arise. The need to retain self-employed status is reflected in the provision that a member cannot be regarded as an “employee” of the LLP if he would not be regarded as an employee if the partners were partners of a general partnership.163

6.

Agency

339 The fundamental rule is that that the LLP agreement sets out the rights and duties of the members between themselves and between themselves and the LLP itself. Where the agreement is silent on any facet of that relationship the LLPA provides that regulations may make provision in respect of that matter.164 340 The Limited Liability Partnership Regulations 2001, SI 2001/1090 (the “Regulations”) in Part VI set out some so-called “Default” provisions such as equality of votes and profit share. It is not at all advisable to permit a situation to arise where these default provisions apply. 341 Every member is an agent of the LLP. The exception is that if a member has no authority to act in a particular way and the person he is dealing with knows he has no such authority or knows or believes that he is not a member, then the LLP will not be liable.165 This again echoes the provisions of company law as they apply to directors.

7.

Designated Members

342 The incorporation document may specify who the designated members are and anyone else becoming a designated member will become so in accordance with the agreement. If nothing is said on incorporation then all members are designated members. Designation means that the designated members have responsibility for appointing auditors and filing accounts and generally being accountable for compliance with a number of administrative obligations.

8.

Changes to Membership

343 The accession of new members or cessation of existing members must be notified to the Registrar within 14 days.166

163 164 165 166

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LLPA LLPA LLPA LLPA

section section section section

4(4). 5(1). 6. 9(1).

Jeff McGeachie

9. Insolvency and Winding-up

9.

England

344

Insolvency and Winding-up

LLPA section 14 provides for the application to LLPs of certain provisions of the In- 344 solvency Act 1986. These provisions are applied under Part IV of the Regulations.

One critical difference is that members (unlike directors) can be required to repay drawings within the two years prior to winding-up if they were made in circumstances where the members knew or ought to have concluded that insolvency was inevitable.167

10. Other Provisions LLPs can create floating charges unlike general partnerships because they have unlim- 345 ited capacity. LLPs are bound to file accounts at Companies House, again unlike general

partnerships. These accounts have to show a “true and fair view”.168

IV. Branches of Foreign Companies/Places of Business 1.

Introduction

The term “oversea company”169 is used to indicate that a company incorporated outside 346 the United Kingdom has, in some way, established itself in the United Kingdom in order to do business. There are two parallel regimes. The Companies Act implements the Eleventh Company 347 Law Directive170 in section 690A in relation to the registration of a branch. At the same time section 691 of the Act contains provisions dealing with the notifica- 348 tion of the establishment of a place of business. The distinction between the two regimes is a fine one. The best course is to regard 349 registration of a branch as more sensible if there is to be a degree of real substance and presence in terms of the activities to be carried on in the United Kingdom. The place of business rules are more appropriate where the activities are in some sense regular or discernible but perhaps not substantial or frequent.

2.

Branch registration

CA Schedule 21A implements the Eleventh Company Law Directive. 167

LLPA section 214A (1)(a).

168

Section 3 of the Regulations. CA section 344. 89 166 / EEC.

169 170

Jeff McGeachie

350

105

351

England

IV. Branches of Foreign Companies/Places of Business

351 The basic obligation is to furnish the completed registration form and submit the required copy documents within one month of establishment of the branch. 352 The documents to be filed include a certified copy of the parent company’s constitutional documents in its country of origin (and a translation if not in English) together with the parent company’s accounts in the form in which they are disclosable in the home territory.171 If the accounts of the parent company are not disclosable in the home territory then accounts and an auditor’s report must be prepared and filed as if the parent company were subject to the accounting provisions of the Act. The Secretary of State can issue exemptions to this rather strict rule.172 353 The names and addresses of the directors of the parent company have to be provided on the prescribed form. At the same time the address of the branch, the date it was opened and the nature of the business to be carried on are disclosable on the form. Details must also be provided of persons authorised to accept service of process as well as the names and usual residential addresses of those authorised to represent the company as permanent representatives.173

3.

Registration of a place of business

354 There is a great deal of similarity with the formalities for registration of a branch. The oversea company must file a certified copy of its constitutional documents (and a translation if not in English) together with the prescribed form duly completed showing the names of directors and the names and residential addresses in Great Britain of those persons authorised to accept service of process. It is also necessary to provide a statutory declaration as to the date the company’s place of business was established. The declaration must be made by a director, the secretary or the person authorised to accept service. It is now possible to replace the statutory declaration with an electronic communication to the same effect from the same person.174 355 The restrictions as to use of corporate names set out in CA section 26 (see # 354 above in Part II) apply also to the names to be used by oversea companies in the United Kingdom. 171 172 173 174

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CA CA CA CA

Schedule Schedule Schedule Schedule

21A, parts 5 and 6. 21D, part 8. 21A, part 3. 21D, part 8.

Jeff McGeachie

Estonia Ermo Kosk/Peeter Lepik

Table of Contents I.

Introduction

II. Public Limited Company 1. 2. a)

b) c) d) e) f) 3. a) b) 4. a) b) c) 5. a)

b)

Character of Public Limited Company (Aktsiaselts) Formation Formation procedure aa) Execution of the formation documents bb) Initial shareholder contributions and their payment prior to registration Registration procedure/ the Commercial Register Approval requirements Shelf companies Cost/Duration Requested information on business letters The shareholder Rights and duties of a shareholder Shareholder resolutions /shareholder meetings The public limited companies share Classes of shares Transfer of shares Own shares The Articles of Association Mandatory content aa) Company name bb) Registered seat cc) Business objective dd) Share capital and amount of shareholder contributions Additional provisions of the Articles of Association

Ermo Kosk/Peeter Lepik

110 112 112 112 112 112

115 116 117 117 117 118 118 118 120 121 121 122 123 124 124 124 125 125 126 126

c) Amendment of the Articles of Association aa) Formally recorded shareholder resolution bb) Registration with the Commercial Register d) Capital increase/decrease 6. Management board a) Managing directors b) Management and representation c) Responsibilities and personal liability of managing directors d) Other representatives of public limited company 7. Supervisory board a) Mandatory supervisory board b) Composition and responsibilities c) Qualifications d) Consultative/advisory council 8. Selected capitalization and liability questions concerning the public limited company a) Prohibition of repayment of shareholder contributions b) Capital substituting loans c) Obligation to petition for insolvency proceedings 9. Accounting a) Bookkeeping and annual financial statements (publication obligations) b) Audit requirements c) Disclosure 10. Taxation 11. Dissolution of a company/ termination of the business 12. Public limited company and limited partnership

127 127 127 127 129 129 130 130 132 132 132 133 134 134

135 135 135 135 136 136 137 138 138 140 141

107

Estonia

Table of Contents

a) In general b) Transfer of partnership interest, participation of new partners, withdrawal of partners and dissolution c) Taxation/accounting

141 142

III. Private Limited Company

143

1. 2. a)

b) c) d) e) f) 3. a) b) 4. a) b) c) 5. a)

b)

108

Character of Private Limited Company (Osahing) Formation Formation procedure aa) Execution of the formation documents bb) Initial shareholder contributions and their payment prior to registration Registration procedure/the Commercial Register Approval requirements Shelf companies Cost/Duration Requested information on business letters The shareholder Rights and duties of a shareholder Shareholder resolutions / shareholder meetings The private limited companies share Classes of shares Transfer of shares Own shares The Articles of Association Mandatory content aa) Company name bb) Registered seat cc) Business objective dd) Share capital and amount of shareholder contributions Additional provisions of the Articles of Association

141

143 143 143 143

145 146 147 147 147 148 148 148 150 151 151 151 152 152 152 152 153 154 154 155

c) Amendment of the Articles of Association aa) Formally recorded shareholder resolution bb) Registration with the Commercial Register d) Capital increase/decrease 6. Management board a) Managing directors b) Management and representation c) Responsibilities and personal liability of managing directors d) Other representatives of private limited company 7. Supervisory board a) Mandatory/optional supervisory board 8. Selected capitalization and liability questions concerning the private limited company a) Prohibition of repayment of shareholder contributions b) Capital substituting loans c) Obligation to petition for insolvency proceedings 9. Accounting a) Bookkeeping and annual financial statements (publication obligations) b) Audit requirements c) Disclosure 10. Taxation 11. Dissolution of a company/termination of the business 12. Private limited company and limited partnership (limited partnership with private limited company as general partner) a) Formation/constitution b) Transfer of partnership interest, participation of new partners, withdrawal of partners and dissolution c) Taxation/accounting

155 155 156 156 157 157 158 158 160 160 160

160 160 161 161 162 162 163 163 164 165

166 166

167 168

Ermo Kosk/Peeter Lepik

Index

Estonia

Index Annual report 162 et seq, 317 et seq Application of incorporation (Aktsiaselts) 27 et seq Areas of activity 89 et seq, 268 et seq Articles of Association (Osahing) 209 et seq Articles of Association (Aktsiaselts) 24 et seq, 104 et seq Audit 167 et seq, 321 et seq Bookkeeping 159 et seq, 317 et seq Branch Office 10 et seq Business forms 7 et seq Business name 17, 83 et seq, 263 et seq Capital increase/decrase 109 et seq, 281 et seq Capital substituting loans 154 et seq, 310 et seq Central Register of Securities 75 Consultative council 149 Contributions in kind 33 et seq, 217 et seq Convertible bond 99 Corporate income tax 179 Criminal liablity of Management Board members 130, 301 Dissolution of company 180 et sec, 333 et seq Equality treatment principle 54, 237 Equity share 72 Formation documents (Aktsiaselts) 17 et seq Formation documents (Osahing) 204 et seq Foundation Agreement/Foundation Resolution (Aktsiaselts) 21 et seq Foundation Agreement/Foundation Resolution (Osahing) 205 et seq Land Tax 179 Legal system in Estonia 1 et seq Liability of Management Board members 127 et seq, 297 et seq Limited company and limited partnership 186 et seq. 339 et seq Local Taxes 179 Management Board 122 et seq, 292 et seq Management Board obligations 126, 296 et seq Management representation 123 et seq, 293 et seq Managing directors 117 et seq, 287 et seq

Ermo Kosk/Peeter Lepik

Notary fee 50, 233 Own shares 78 et seq, 259 et seq Petition for insolvency proceeding 156 et seq, 312 et seq Preferred share 72 Premium 99 Private limited company (Osahing) 202 et seq Procurator 131 et seq, 302 et seq Prohibition of repayment of shareholder contributions 151 et seq, 307 et seq Public limited company (Aktsiaselts) 13 et seq Registration in the Commercial Register 37 et seq, 220 et seq Seat of business 86 et seq, 266 et seq Share capital 14, 94 et seq, 269 et seq Share classes 69 et seq, 252 Shareholder contribution (Aktsiaselts) 30 et seq, 219 et seq Shareholder rights 54 et seq, 237 et seq Shareholders competence 62 et seq. 244 et seq Shareholders liability 60, 243 Shareholders meetings 61 et seq, 246 et seq Shelf company 46, 229 Social Tax 179 State fee 49, 232 Supervisory Board (Aktsiaselts) 135 et seq Supervisory Board (Osahing) 306 et seq Taxation in general 176 et seq The Commercial Code 4 et seq Transfer of shares 73 et seq, 253 et seq Types of limited companies 13 Unemployment Contributions 179 Value Added Tax 179

109

1

I.

Estonia

I. Introduction

Introduction

1 The legal system in Estonia is based on the Continental European civil law model and has been influenced by the German legal system. The Estonian Constitution emphasises its origins in the Continental European legal culture in its § 3 which sets out: “The powers of state shall be exercised solely pursuant to the Constitution and laws which are in conformity therewith.” 2 Estonian law is basically divided into private and public law. Generally private law consists of civil law and commercial law. Public law consists of international law, constitutional law, administrative law, criminal law, financial law and procedural law. The Republic of Estonia is a member of the EU and has implemented EU directives. 3 The Commercial Code (A¨riseadustik) was passed by the Riigikogu on February 15, 1995 (came into force on September 1, 1995; last amendments came into force on January 1, 2004). In addition to the Commercial Code, specific areas of business activity are governed by special norms provided in the Commercial Associations Act (adopted on 19 December 2001), Accounting Act (adopted on 20 November 2002), Credit Institutions Act (adopted on 9 February 1999), Insurance Activities Act (adopted on 6 June 2000), Securities Market Act (adopted on 17 October 2001) etc. 4 The Commercial Code sets forth the basic principles of entrepreneurial activity in Estonia. The initial draft drew inspiration from the German model, though local practice and subsequent amendments have resulted in a framework most suitable for the local conditions and somewhat different from the German example. A basic idea of the Commercial Code is to require registration of all commercial entities operating in Estonia. To accommodate registration, the Estonian government has created a Commercial Register, which operates through its court system. 5 According to the General Part of the Civil Code Act (adopted on 27 March 2002) the passive legal capacity of a legal person in private law arises as of entry of the legal person in the register prescribed by law. The passive legal capacity of a legal person is the capacity to have civil rights and perform civil obligations. A legal person may have all civil rights and obligations, except those intrinsically human. The Commercial Code also stipulates the same principle that the passive legal capacity of a company shall commence as of its entry in the Commercial Register and shall terminate as of its deletion from the Commercial Register. Entrepreneurs wishing to create a new business entity must be prepared to register it. They may select any one of the available business forms to register, and the Commercial Code sets forth the rights and obligations of commercial activities undertaken in these various forms. 6 The Commercial Code provides a definition for the trader and different types of commercial undertakings. A trader can be either a natural person or commercial undertaking. A trader operates through an enterprise, which includes objects, rights and duties pertaining to the trader. Upon transfer of ownership or possession of the enterprise, the liabilities of enterprise are also transferred. 110

Ermo Kosk/Peeter Lepik

3. Registration of a place of business

Estonia

7

The simplest way to conduct business is to be a sole proprietor. No special formalities 7 are required for that. Sole proprietor is liable for his or her obligations with all of his or her assets. There are five types of commercial undertakings – general partnership (ta¨isu¨hing), limited partnership (usaldusu¨hing), private limited company (osau¨hing), public limited company (aktsiaselts), and commercial cooperatives (tulundusu¨histu). A general partnership is a full liability company in which two or more partners operate 8 under a common business name and are solidarily liable for the obligations of the general partnership with all of their assets. There is no minimum capital requirement and partners shall make monetary or non-monetary contributions in the amount prescribed by the partnership agreement. Each partner will receive a portion of the distributed profit corresponding to the partner’s contribution, unless the partnership agreement prescribes otherwise. A limited partnership is a company in which two or more persons operate under a 9 common business name, and at least one of the persons (general partner) is liable for the obligations of the limited partnership with all of the general partner’s assets, and at least one of the persons (limited partner) is liable for the obligations of the limited partnership to the extent of the limited partner’s contribution. The articles governing general partnerships also apply to the limited partnerships subject to certain exceptions. A limited partner shall not have the right to manage or represent the limited partnership unless the partnership agreement prescribes otherwise. A branch office is the only business form that outright assumes there will be foreign 10 participation. It provides the possibility for a foreign entity to locate in Estonia, and undertake activities without having to create a separate local corporate entity. The branch does not have separate legal capacity and the foreign parent is liable for all obligations of the branch office. The branch of a foreign company is established after its registration in the Commercial Register. To register a branch, the application must be submitted. A foreign company shall appoint a director or directors for the branch. At least one of the directors has to reside in Estonia. The business name of the branch of a foreign company shall consist of the business 11 name of the company and the words ‘‘Eesti filiaal’’ [Estonian branch]. As a rule, the registration process takes up to three weeks if not to include the time for obtaining the appointment of a notary. The most popular forms for companies in Estonia are the private limited company and 12 the public limited company. Those two forms are quite similar to each other but nevertheless there exists several differences as well. The law contains fewer rules on the private limited company, which allow several forms of agreement. There are also fewer formalities concerning the private limited company than the public limited company. In general, the public limited companies are larger organisations than the private limited companies.

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13

Estonia

II. Public Limited Company

II. Public Limited Company 1.

Character of Public Limited Company (Aktsiaselts)

13 The Commercial Code has established two types of limited liability commercial undertakings – the public limited company and the private limited company. The main difference between the aforesaid commercial undertakings consists in the level of statutory requirements. For example, for the public limited company the Commercial Code has established the requirement for tenfold minimum capital, existence of the supervisory board and annual audit report. 14 The public limited company is a company that has share capital divided into shares, the share capital must be a minimum of EEK 400,000 (approximately EUR 25,560). Stockcapital consists of shares, the minimum nominal value whereof being 10 EEK. Shares may be of different class. Companies may also issue preferred shares and convertible bonds. 15 Shares shall be registered in the Estonian Central Register of Securities. Registered shares may be freely transferred, however, the Articles of Association may prescribe that, upon transfer shares to third persons, other shareholders have a pre-emptive right which applies to each transfer of shares for charge and the term of which shall not exceed two months as of the presentation of the transfer agreement. 16 The law has established considerably higher requirements for the public limited company than for the private limited company because the law has intended the use of these forms of companies for enterprises of different sizes, i.e. the public limited company for the larger ones and the private limited company for the smaller ones.

2.

Formation

a)

Formation procedure

aa)

Execution of the formation documents

17 At the outset, care must be taken with respect to selecting the name of the entity. First, the name of a company must indicate to the organisational form of the company – ‘‘AS’’ or ‘‘aktsiaselts’’ for joint-stock company must be included in the trade name of the company. The appendages and abbreviations may only be used at the beginning or end of the business name. 18 Moreover, before any foundation documents are signed, the name of the company must be checked from the Commercial Register to ascertain that the name or a similar name is not already in use. The trade name of the company may not include the registered trademark of other persons without the consent from the owner of the trademark, if the company is active in the same field as the trademark owner. The Commercial Code enacts also other restrictions when selecting the business name – the name shall be clearly distinguishable from other business names entered in the Commercial Register 112

Ermo Kosk/Peeter Lepik

2. Formation

Estonia

19

in Estonia and from other business names deleted from the Commercial Register less than three years ago; business name shall not be misleading with regard to the legal form, area of activity or scope of activity of the undertaking and shall not be contrary to good morals. Once the name is selected, the Commercial Code sets forth a process for registering 19 the company. This means going through with corporate formalities, assembling certain documents and information, and submitting this for approval to the Commercial Register. The public limited company can be founded either by subscription for shares or without 20 the same. Foundation without the subscription for shares requires conclusion of a Foundation Agreement and the Articles of Association, contribution for the shares, submitting of an application to the Commercial Register and registration of the company. In case the foundation of the public limited company is executed with subscription for shares, besides the subscription for shares a foundation meeting shall follow. In general, the first step is to develop the Foundation Agreement. This document 21 must be submitted to the Commercial Register once all of the preliminary steps are completed. In case there is only one founder, this document is called a Foundation Resolution. This document must be notarised by a notary public domiciled in Estonia and must be signed by all founders. A representative of a founder may sign the Foundation Agreement if the authorisation document granted to the representative is notarised. Where the only founder is a foreign company, the legal competence of the founder also 22 must be documented. To do this, it is necessary to provide to the notary the Certificate of registration (or the relevant equivalent) of the foreign company, notarised and legalised. Also, the signatory rights of the persons signing on behalf of the foreign company must be verified. In case a power of attorney is granted to provide such rights, the power of attorney must also be notarised and legalised. The Foundation Agreement /Foundation Resolution shall set out: (1) the business name, seat, address and area of activity of the public limited company being founded; (2) the names and residences or seats of the founders; (3) the proposed amount of share capital; (4) the number and nominal value of shares and, upon issue of more than one class of shares, their denotation and the rights attaching to the shares, and the division of shares among the founders; (5) the amount to be paid for shares and the procedure, time and place of payment; (6) if a share is paid for by a non-monetary contribution, the item of the non-monetary contribution and its valuation method; (7) information on the members of the management board and the supervisory board, and the auditor; (8) information on procurators, if appointed; (9) the projected costs of foundation and the procedure for payment thereof. Ermo Kosk/Peeter Lepik

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24

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24 A second document that must be prepared and submitted as an appendix to the Foundation Agreement is the Articles of Association. The Articles of Association set forth the basic corporate structure of the entity. This includes the business name, seat and area of activity of the company; the minimum and maximum amount of the share capital (with a minimum to be at least of the maximum capital); the nominal values of shares; and the amount of the reserve capital. In addition, the Articles of Association of the joint-stock company must contain information about the different kinds of shares, their par value and the respective rights of the shareholders out of different shares, how the general meeting is convened and how the decisions are made, the number of the members of the management board and the supervisory board (may be expressed as a specific number or as a maximum and minimum number), how the inkind contributions are assessed. 25 In addition, to preparing of the above documents, the founders must nominate the members of the various oversight groups for the corporate entity. This includes the members of the supervisory board, the management board and the auditor. It will be necessary later to submit information about these persons as part of the registration process. 26 At a certain point before the above documents are submitted for registration, the founders must open a bank account for the company to be formed, and the share capital is paid in full amount to this account. The founders may not withdraw money from that account before the company is registered in the Commercial Register. 27 Once the above is completed, the management board of the corporate entity submits an application of incorporation to the Estonian Commercial Register. The application to the Commercial Register must be filed within six months from the day the Foundation Agreement /Foundation Resolution was executed and must be signed by all the members of the management board. 28 The application must contain the following information: (1) the trade name; (2) the field(s) of activity of the entity, and its location and address; (3) the amount of the share capital; (4) the date that the foundation agreement was executed; (5) the names, personal codes and addresses of the members of the management board; (6) if the Articles of Association prescribe that all or some of the members of the management board may represent the public limited company jointly (according to law every member of the management board may represent the company in all legal acts) then the members of management board who can represent the company jointly; (7) the beginning and end of the financial year; and (8) other information provided by laws. 29 Certain documents should also be submitted to the Commercial Register as annexes to the application. According to law, following documents must be submitted: 114

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2. Formation

a) b) c) d)

e) f) g) h) i)

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30

the Foundation Agreement; the Articles of Association; a notice from the bank confirming that the share capital has been paid in full; in case of contributions in kind, documents proving that these contributions are handed over to the company, the documents certifying the value of the contribution and an opinion on the valuation of the non-monetary contribution signed by the auditor; the names, addresses and personal codes of the members of the supervisory board and auditors; sample signatures of the members of the board, certified by the notary; telecommunications numbers (telephone, facsimile, etc.); a notice from the registrar of the Estonian Central Register of Securities concerning registration of the shares; other documents provided by law (a notice confirming that the state fee for registration is paid).

bb) Initial shareholder contributions and their payment prior to registration

The shareholders shall pay for shares in full before submission of a petition for entry of 30 the public limited company in the Commercial Register unless the Foundation Agreement prescribes an earlier due date. Requirement that the share capital must be factually paid before the Commercial Register entry and that the registrar will control whether the payments are done should guarantee that the company has the finances described in the Foundation Agreement. The issue price of a share shall not be less than the nominal value of the share. The share capital contributions must assure that the interests of the creditors are protected. There are cases in court practice where applications of incorporations are not satisfied because the founders have not made real contributions. A contribution may be monetary or non-monetary. A share shall be paid for in money 31 unless the Articles of Association prescribe payment by a non-monetary contribution. Upon foundation, the founders shall open a bank account in the name of the public 32 limited company being founded into which monetary contributions shall be paid. Contributions in kind may be done if so prescribed in the Articles of Association. A 33 non-monetary contribution may be any thing, which is monetarily appraisable and transferable to the public limited company or a proprietary right, which may be the object of a claim. A non-monetary contribution can not be service or work provided to the public limited company or the activities of the founders in the foundation of the public limited company. A shareholder must give notice of the rights of third persons with regard to a non-monetary contribution. In order to make a non-monetary contribution, an agreement concerning the transfer of 34 the item of the non-monetary contribution shall be concluded with the company being founded. The agreement shall be in writing unless notarial attestation or notarial certification is required by law for transfer of a certain item.

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35 The valuation method of a non-monetary contribution should be also prescribed in the Articles of Association. The usual value of a thing or right shall be taken as the basis for the valuation of a non-monetary contribution. According to the General Part of Civil Code Act, the usual value of an object is its average local selling price (market price). An auditor audits the valuation of a non-monetary contribution and presents an opinion on whether the contribution meets the requirements specified in Commercial Code (monetarily appraisable and transferable thing or right which may be the object of a claim). An opinion of an auditor shall contain a description of a non-monetary contribution and shall set out the method which was used upon valuation of the non-monetary contribution and whether the value of the non-monetary contribution corresponds to the nominal value and issue premium of the share paid for by the nonmonetary contribution. 36 The Articles of Association may prescribe that a shareholder who does not pay for the shareholder’s share on time is required to pay an interest for delay at the rate prescribed by the Articles of Association. If the shareholder has not made contributions in time described in the Articles of Association he or she will not automatically lose the right for the share. The management board must send a notice to the shareholder who delays in payment demanding payment during the term specified in the letter, indicating that the shareholder shall lose the shareholder’s share if payment is not made. The term for payment shall be at least fifteen days after the notice is sent. If the shareholder does not pay the deficient sum during the term specified in the notice, the shareholder shall lose the shareholder’s share. A sum paid by the shareholder which does not exceed one-fifth of the nominal value of the share shall be transferred to the reserve capital, and the remainder of the sum shall be refunded to the shareholder. b)

Registration procedure/the Commercial Register

37 After concluding the Foundation Agreement or the Foundation Resolution the founders should make contributions for shares and fulfil other obligations enacted in the Foundation Agreement or Foundation Resolution and law (for example get an activity licence if needed). 38 Before filing an application of incorporation to the Commercial Register the shares of the public limited company shall be registered in the Estonian Central Register of Securities. The Estonian Central Register of Securities will register all shares and gives out a notice concerning the registration of the shares. 39 The management board of the public limited company can file an application of incorporation to the Commercial Register to register the company when contribution for shares are paid and when the shares are registered in the Central Register of Securities. If non-monetary contributions are done then a register entry (for example the Land Register entry) shall show companies right of ownership. The documents that certify the right of ownership of the company must be filed to the Commercial Register. 40 The application to the Commercial Register to register the company must be filed within six months from the day the Foundation Agreement /Foundation Resolution was 116

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executed. If the application is not filed to the Commercial Register in six months then the company won’t be registered and the state fee won’t be returned. The registrar in whose territorial jurisdiction the seat of a company is located makes 41 entries in the Commercial Register. After review of an application, the competent person shall make a judgement on entry which satisfies the petition or denies it. An entry in the Commercial Register enters into force upon signature by the person enforcing the judgement on entry and by the person who is competent to make the judgement on entry. After the company is registered in the Commercial Register, it becomes a legal entity and acquires full legal capability. It is required to submit the documents which are the basis for an entry (formation 42 documents, 2. a) aa)) and specimen signatures to the registrar. The specimen signatures shall be notarised. The registrar may also demand supplementary documents from the undertaking if these are necessary to determine the facts that are the basis for an entry. The documents submitted to the registrar shall be originals or notarised copies unless 43 otherwise provided by law. All documents must be in Estonian, documents in a foreign language shall be submitted to a registrar together with a notarised translation. Documents are reviewed and judgements on entries are made by way of written proceedings. c)

Approval requirements

Before making an entry the registrar checks that all documents contain the information 44 prescribed by law. The registrar will verify that the business name is in conformity with the requirements of law. If the business name is not in conformity with the requirements of law, the registrar shall propose that a new business name must be chosen during the term designated by the registrar. If an entry in the Commercial Register is applied for with regard to an area of activity for which an activity licence is required, such licence shall be submitted to the registrar in advance. The registrar shall not have the right to decline to make an entry if all documents 45 required by law are submitted, and they comply with the requirements of law. d)

Shelf companies

There are no restrictions concerning the foundation of shelf companies. As an alter- 46 native to founding a new company it is possible to buy so called shelf company. e)

Cost/Duration

The registration process itself takes approximately 3-4 weeks. According to the Com- 47 mercial Code, an entry order shall be made within 15 days from the day when the application was submitted. The chief judge of the county or city court which maintains the Commercial Register may, on the existence of circumstances requiring special investigation, extend the term by up to thirty days.

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48 After a judgement on entry is made, the registrar shall enter the text of the entry on the registry card. The text of the entry shall be signed by the person enforcing the judgement and by the person competent to make the judgement. 49 According to the State Fees Act (adopted on 22 October 1997) the state fee to be paid for the entry of a public limited company in the Commercial Register is in the amount of 0.2 per cent of the share capital but not less than EEK 4000 (approximately EUR 255) and not more than EEK 40,000 (approximately 2565 EUR). 50 A notary fee for the Foundation Agreement/Foundation Resolution and the Articles of Association depends on the bigness of share capital of the public limited company. The Notary Fees Act (adopted on 20 March 1996) stipulates a table of transaction values and the notary fees for those values. When a company is founded, the transaction value equals the bigness of share capital. The maximum transaction value taken into account when calculating the notary fee is EEK 100,000,000 (approximately EUR 6,410,256). When one person concludes the Foundation Resolution then the notary fee is the sum enacted in the table of transaction values but if there are more than one founder and the Foundation Agreement is concluded then the notary fee is doubled. 51 For a public limited company with the minimum share capital EEK 400,000 the notary fee for the Foundation Resolution and the Articles of Association is EEK 710 (approximately EUR 45). But when there are many founders who conclude the Foundation Agreement and the Articles of Association then the notary fee will be doubled (EEK 1420). 52 The notary fee charged for the Foundation Agreement/Foundation Resolution and the Articles of Association covers the fee for legal consultations and drafting of documents, the fee for sending the documents to the Commercial Register and giving petitioner a copy of the judgement on entry concerning the application, the court ruling and the notice of the making of an entry. f)

Requested information on business letters

53 The commercial documents of the undertaking shall indicate the business name, seat and commercial registry code of the undertaking.

3.

The shareholder

a)

Rights and duties of a shareholder

54 According to the Commercial Code, the shareholders shall be treated equally under equal circumstances (equality treatment principle). All shareholders should have same rights and obligations and differences may only come from different kind of shares (for example, the owners of preferred shares may have the right to receive dividends earlier than other shareholders). Exceptions from the equality treatment principle may be done only when the shareholder agrees that he or she is treated inequitably. 118

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A share shall grant the shareholder the right to participate in the general meeting of 55 shareholders and in the distribution of profits and, upon dissolution, of the remaining assets of the public limited company, as well as other rights provided by law or prescribed by the Articles of Association. Additionally, the Code enacts shareholders right to information and right to dispute the resolutions of governing bodies, right to vote and shareholders pre-emptive right to subscribe for the new shares. According to the Commercial Code, a shareholder has the right to receive information 56 on the activities of the public limited company from the management board at the general meeting. This right is not restricted with agenda of the general meeting and shareholder may demand other information concerning companies’ activity. The management board may refuse to give information if there is a basis to presume that this may cause significant damage to the interests of the public limited company. The Shareholders’ right to information is also guaranteed by the obligation of the management board to provide shareholders the opportunity to examine the annual report for at least two weeks before the general meeting. Reports of merger, division and transformation should also give shareholders information needed to understand the legal and economical consequences for the company. The shareholder has a right to dispute resolutions of the supervisory board, general 57 meeting and also management board if the resolution is not in accordance with law or the Articles of Association. It must be noted that in court practice the shareholders can not dispute resolutions concerning everyday economic activity and transactions of the company because the share does not give the shareholder a right to participate in companies’ everyday economic activity. Shareholders’ rights also depend on the amount of share capital owned: a) the shareholders who have at least 1/10 of the share capital may demand: – the inclusion of a certain issue on the agenda; – a special general meeting to be held; – a meeting of the supervisory board; – with good reason, the removal of a member of the supervisory board by a court; – a resolution on conduct of a special audit on matters regarding the management or financial situation of the company (at the general meeting of shareholders); – appointing the liquidators by court in a compulsory dissolution. b) the shareholders who have at least 1/4 of the share capital may demand a special audit and that an auditor for the special audit is appointed by a court. c) the shareholders who have at least 9/10 may demand that the general meeting may decide in favour of the shares belonging to the remaining shareholders of the public limited company (minority shareholders) being taken over by the majority shareholder in return for fair monetary compensation.

58

According to the General Part of Civil Code Act the shareholders of a company shall 59 act in accordance with the principle of good faith and consider each other’s legitimate interests in their mutual relations. The shareholders shall follow the interests of the public limited company when voting. Ermo Kosk/Peeter Lepik

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60 A shareholder is liable for any damage wrongfully caused to the public limited company, another shareholder or third persons, in the capacity of shareholder; he or she is not liable for any damage caused if the shareholder did not participate in the adoption of the resolution of the general meeting which was the basis for the cause of damage or if the shareholder voted against the resolution. This shareholder’s liability is not at variance with the limited liability principle because the shareholder is not responsible for the obligations of the public limited company. b)

Shareholder resolutions /shareholder meetings

61 The general meeting of shareholders is the highest directing body of a public limited company and shareholders shall exercise their rights in the public limited company at the general meeting of shareholders. If a public limited company has one shareholder, the shareholder has all the rights of the general meeting. 62 The Commercial Code enacts competence of the general meeting of shareholders and according to the law, the general meeting is competent to: (1) amend the Articles of Association; (2) increase and reduce the share capital; (3) issue convertible bonds; (4) elect and remove the members of the supervisory board; (5) elect an auditor; (6) designate a special audit; (7) approve the annual report and distribute profit; (8) decide on dissolution, merger, division or transformation of the public limited company; (9) decide on assertion of a claim against a member of the management board or supervisory board, or a shareholder, on conclusion and terms and conditions of a transaction with a member of the supervisory board, and on the appointment of a representative of the public limited company in such claim or transaction; 63 The general meeting may also have the right to decide on other matters placed in the competence of the general meeting by law. For example, the law allows to enact in the Articles of Association that the annual budget of the public limited company may be approved by the general meeting (otherwise it is under jurisdiction of the supervisory board). According to the General Part of Civil Code Act, the competence of a body of a legal person may not be transferred to any other body or person. The competence of the general meeting may not be enlarged or reduced with the Articles of Association or other acts if it is not allowed by law. 64 The general meeting may be annual or special general meeting. The management board shall call the annual general meeting pursuant to the procedure and at the time prescribed by the Articles of Association but not later than six months after the end of the financial year. The special general meeting shall be called if the net assets of the public limited company are less than one-half of the share capital or less than the amount of minimum share capital provided by law or if it is demanded by the supervisory board or 120

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4. The public limited companies share

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65

the auditor or shareholders whose shares represent at least one-tenth of the share capital. For protection of the minority shareholders the law enacts mandatory regulations of the 65 notice calling the general meeting, the agenda and procedure of the general meeting. The management board shall send the notice of the general meeting to shareholders 66 who have registered shares. The notice of an annual general meeting shall be given at least three weeks and notice of a special general meeting shall be given at least one week in advance unless the Articles of Association prescribe a longer term. The notice shall be sent to the address entered in the share register by registered mail. If the public limited company has more than 100 shareholders, notices need not be sent to the shareholders, however a notice of the general meeting shall be published in at least one daily national newspaper. A notice calling a general meeting must set out: (1) the business name and seat of the public limited company; (2) the time and place of the general meeting; (3) a notation with regard to whether the meeting is annual or special; (4) the agenda of the general meeting; (5) other important circumstances related to the general meeting; (6) the place the annual report is available for examination (when an annual general meeting is called).

67

A shareholder in person or a representative of a shareholder who has been granted an 68 authorisation document in writing may participate in a general meeting. The general meeting may adopt resolutions if over one-half of the votes represented by shares are present unless the Articles of Association prescribe a greater representation requirement. A resolution of a general meeting shall be adopted if over one-half of the votes represented at the general meeting are in favour unless the law or the Articles of Association prescribe a greater majority requirement.

4.

The public limited companies share

a)

Classes of shares

Shares with the same rights form a class of shares. It means that shares with different 69 nominal values and votes do not classify as different shares because the rights of shares are same. According to the Commercial Code, there may be two classes of shares that are allowed in Estonian corporate law – equity and preferred share. The sum of the nominal values of preferred shares may not be greater than one-third of the share capital. Making distinction between different kind of shares is important when proceeding the 70 general meeting and adopting the resolutions because in some cases it is needed that certain amount of shareholders who own different classes of shares are in favour (for Ermo Kosk/Peeter Lepik

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example, when amending the Articles of Association, deciding transformation of the company). 71 Rights attaching to the shares may only be different in the cases provided by law. It means that enacting new kind of shares in the Articles of Association is not allowed. The Commercial Code stipulates that with the Articles of Association it is possible to provide shares with different rights when distributing profit. 72 An equity share gives a shareholder the right to vote in the general meeting. Owner of a preferred share does not have the right to vote but the company is obligated to pay dividends. It is allowed to stipulate in the Articles of Association that a preferred share grants the right to vote in the adoption of certain resolutions (restricted voting right). A holder of a preferred share shall be paid a dividend prior to the payment of dividends to other shareholders. If the public limited company does not have distributable profit or if it is insufficient, the dividends to the holders of preferred shares may be left unpaid in whole or in part. The unpaid part shall be added to the dividend to be paid the following year, including interest. b)

Transfer of shares

73 In general, the shares may be freely transferred. 74 The Articles of Association may prescribe that, upon transfer of shares to third persons, other shareholders have a pre-emptive right which applies to each transfer of shares for charge and the term of which shall not exceed two months as of the presentation of the transfer agreement. The seller shall notify the management board of the public limited company of entry into a contract of sale, which shall promptly notify the other shareholders thereof. The right of pre-emption is exercised by the another shareholder with the right of pre-emption submitting corresponding notification to the seller. The notification shall be made in the same form as the contract of sale. 75 All shares shall be registered in the Estonian Central Register of Securities. The Commercial Code and Estonian Central Register of Securities Act do not stipulate mandatory form for the share transfer agreement but according to the Commercial Code the seller shall present transfer agreement to the management board so other shareholders may use their pre-emptive right. That clearly indicates that if the Articles of Association enacts pre-emptive right of other shareholders then the share transfer agreement should be in written form or at least in format which can be reproduced in writing. 76 Technically, share transfer procedure depends on whether the shares are listed in the Tallinn Stock Exchange or not. If the shares are listed in the stock exchange then transfer takes place according to the stock exchange regulations. Most companies’ shares are not listed in the stock exchange and the security transfer takes place stock exchange externally by concluding a contract. 77 Rights to the securities entered in the register are deemed applicable with regard to third parties only if such rights are entered in the register. The transferee has the right 122

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to demand to be entered as a shareholder in the share register. For the purposes of the public limited company, the share shall be deemed to be transferred as of entry of the transferee in the share register. This means that the right of ownership of the share may go over to the transferee before the entry to the register is done but new owner can use his or her shareholder’s rights when entry to the Central Register of Securities is done. c)

Own shares

Generally speaking, a public limited company may not itself or through a third person 78 acting in its own name but at the expense of the public limited company subscribe, acquire or take as security its own shares. Main purpose of this prohibition is to assure protection of the creditors. The shareholders are not responsible for the companies’ obligations and the creditors are interested that the contributions made by the shareholders will stay in the company and that shareholders could not sell their shares back to the company or take their contributions back. As exception, the Commercial Code allows to acquire or take as security of companies’ 79 own shares when following conditions occur: a) a resolution of the general meeting is adopted which specifies the terms and conditions and term for the acquisition or taking as security of shares and the sums to be paid for the shares; b) this occurs within one year after adoption of the resolution; c) the sum of the nominal values of the shares held or taken as security by the public limited company does not exceed one-tenth of the share capital; and d) the shares are paid for from assets exceeding the share capital, reserve capital and premium. The public limited company may acquire shares without aforesaid restriction by succes- 80 sion or by a resolution of the supervisory board if the acquisition of shares is necessary to prevent significant damage to the company (without resolution of the general meeting). The public limited company shall transfer own shares within one year after the acqui- 81 sition. If the own shares are acquired by succession or by a resolution of the supervisory board and the sum of their nominal value exceeds one-tenth of the share capital, the shares in excess of the one-tenth shall be transferred within six months after the acquisition. Illegally acquired own shares must be transferred within three months. If the shares are not transferred in time enacted in law, the shares shall be cancelled and the share capital reduced accordingly. It is important that a public limited company’s own shares do not grant the company 82 any rights of a shareholder. Own shares are not taken into account when the quorum of a general meeting is calculated. But the own shares are considered when the share capital is increased by a bonus issue.

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5.

The Articles of Association

a)

Mandatory content

aa)

Company name

II. Public Limited Company

83 Companies’ business name is a name under which an undertaking operates and it is entered in the Commercial Register. The business name is a mandatory content of the Articles of Association and it must be also included in the Foundation Agreement. An undertaking has the exclusive right to the business name of the undertaking. 84 The public limited company may only have one business name like other companies in Estonia and the name shall include appendage ‘‘aktsiaselts’’ [public limited company] or abbreviation of it ‘‘AS’’. The appendages and abbreviations may only be used at the beginning or end of the business name. 85 In general terms, an undertaking may freely choose a business name. The Commercial Code enacts some restrictions for choosing a business name. Some of them are following: (1) In practice the most important requirement is that the business name must be clearly distinguishable from other business names entered in the Commercial Register in Estonia and from other business names deleted from the Commercial Register less than three years ago. Desirably the business name should be checked from the Centre of Registers (Ministry of Justice). Verifying the right to start using the business name by an undertaking is regulated by Decree of Minister of Justice and according to that request may be done by an e-mail, fax or post. It must be noted that the reply from the Centre of Registers may not give the definite opinion because the decision whether the name is clearly distinguishable or not is done by a court. In addition, everybody can check business name’s originality from the central database of the Centre of Registers which is accessible in webpage http://info.eer.ee. (2) A protected trademark in Estonia can not be used as a business name unless the undertaking is engaged in an area of activity in respect of which the trademark is not protected. It is possible to use the protected trademark if the owner of the trade mark gives a notarised consent. (3) A business name should not be misleading with regard to the legal form, area of activity or scope of activity of the undertaking. In practice, common faults appendages in a foreign language (Ltd, GmbH, & Co, PLC, Corporation, OY). (4) A business name shall not be contrary to good morals. (5) The names of state and local government bodies and agencies shall not be used in a business name. The words ‘‘riigi’’ [state], ‘‘linna’’ [city] and ‘‘valla’’ [rural municipality], and other words which refer to the participation of a local government may be used in the business name of a company only if the state or local government holds more than one-half of the shares of the company.

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86

bb) Registered seat

According to the Commercial Code, the seat of business of the legal person is man- 86 datory content of the Articles of Association. The seat of the public limited company will also be entered in the Commercial Register. The definition for the seat of a legal person is given in the General Part of Civil Code 87 Act and according to that it is the location of the management board. It must be noted that the seat may be different than the place of business of a legal person. The place of business is the place where the permanent and continuous economic activity of the company or other activities specified in the Articles of Association are carried out. The company may have many places of business, those are not entered in the Commercial Register and are not mandatory content of the Articles of Association. The seat of company is important when registering the company because according to 88 the Commercial Code, entries in the Commercial Register are done by the registrar in whose territorial jurisdiction the seat of the company is located (at the moment there are four Registration Departments in Estonia). If the seat of the company changes and the new seat is in the territorial jurisdiction of another registrar, the registrar of the new seat opens a registry card and note thereon the valid entries and also the invalid entries necessary to understand the valid entries. cc)

Business objective

The Commercial Code demands that the areas of activity shall be included in the 89 Articles of Association and those are also registered in the Commercial Register. If in general the data included in the Commercial Register has a legal meaning then the 90 areas of activity is the only exception. The company may operate in areas of activity in which operation is not prohibited by law and this does not depend on whether the activity is registered in the Commercial Register or included in the Articles of Association. The Commercial Code enacts some restrictions. There are many areas of activity for 91 which a license is required or in which only a particular class of undertaking may operate (for example weapon and medication commerce; international auto transportation services; air, railroad and sea transport; security services; medicine; alcohol and tobacco; telecommunication etc.). Criminal activities or activities that may be against good morals are also prohibited. If an entry in the Commercial Register is applied for with regard to an area of activity 92 for which an activity licence is required, such licence shall be submitted to the registrar in advance. Usually when company hasn’t registered yet, temporary licence may be given for registration. The regulation of the areas that need licences is quite complicated because regulations are in many different acts and decrees. The area of activity indicated in the Articles of Association of a company and in the 93 entry in the Commercial Register concerning the area of activity of an undertaking may not be misleading with regard to the type or scope of activity of the undertaking. This Ermo Kosk/Peeter Lepik

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provision is not widely used by the registrar but mainly it means that the area of activity shall not be too widespread (for example “business activity”). dd) Share capital and amount of shareholder contributions

94 The Articles of Association of the public limited company shall set out the amount of share capital which may be specified as a specific amount or as a minimum and maximum capital such that the minimum capital shall be at least one-quarter of the maximum capital. The share capital of the public limited company must be at least EEK 400,000 (approximately EUR 25,560). 95 Mandatory provision is also the nominal value of shares. The minimum nominal value of a share is EEK 10. If the nominal value of a share is greater, the nominal value must be a multiple of EEK 10. If the company has different classes of shares then the Articles of Association must stipulate their denotation, the nominal value of each class of shares and the rights attaching thereto. 96 Issues concerning shareholders contributions are mainly stipulated in the Foundation Agreement (the amount to be paid for shares and the procedure, time and place of payment). It is important that the non-monetary contribution for shares may only be done if so prescribed in the Articles of Association. If a share is paid for a non-monetary contribution, the valuation method of the non-monetary contribution shall also be stipulated in the Articles of Association. b)

Additional provisions of the Articles of Association

97 The Commercial Code stipulates that in addition to foregoing content the Articles of Association must include also: (a) the procedure for calling the general meeting and for adoption of resolutions; (b) the number of members of the management board and supervisory board which may be expressed as a specific number or as a maximum and minimum number; (c) the amount of reserve capital. 98 The Articles of Association may also prescribe other terms and conditions that are not in conflict with the law. If a provision is in conflict with a law, the law shall apply. 99 Besides possibility to allow the non-monetary contributions for shares in the Articles of Association, the law also enacts that certain provisions may only be validated in the Articles of Association. For example, if so prescribed in the Articles of Association, the public limited company may issue bonds which are convertible to shares (convertible bond) and shares with greater issue price than its nominal value (premium). 100 A pre-emptive right of shareholders upon transfer of shares for charge to third persons may also be prescribed in the Articles of Association. Otherwise shareholders do not have the pre-emptive right. 101 In general, a shareholder shall be paid a share of profit (dividend) according to the nominal values of the shareholder’s shares. The Articles of Association may prescribe 126

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5. The Articles of Association

Estonia

102

different rights attaching to the different classes of shares with regard to distribution of profit. It is also allowed to stipulate in the Articles of Association that a greater majority of 102 votes than enacted in law (over one-half of votes) must be in favour to adopt resolutions at the general meeting. When regulating other matters in the Articles of Association which are not enacted in 103 the law, it must be noted that the condition may not be in contradiction with the general principles of the Commercial Code and with the principle that the shareholders shall be treated equally under equal circumstances. c)

Amendment of the Articles of Association

aa)

Formally recorded shareholder resolution

According to the Commercial Code, the general meeting of shareholders is competent 104 to amend the Articles of Association. If generally a resolution of a general meeting is adopted when over one-half of the 105 votes represented at the general meeting are in favour then law prescribes a greater majority requirement for amending the Articles of Association. A resolution on amendment of the Articles of Association is adopted if at least two-thirds of the votes represented at the general meeting are in favour. If the company has several classes of shares then at least two-thirds of the votes represented at the general meeting of each class of share must be in favour. The Articles of Association may prescribe a greater majority requirement. All requirements enacted in the Commercial Code and in the Articles of Association 106 concerning the procedure of calling the general meeting and proceeding the general meeting must be also followed. bb) Registration with the Commercial Register

The petition submitted to the Commercial Register to change the Articles of Associa- 107 tion must also include the resolution of the general meeting on amendment of the Articles of Association, the transcript of the general meeting and the new text of the Articles of Association. A resolution on amendment of the Articles of Association enters into force as of the 108 making of a corresponding entry in the Commercial Register. d)

Capital increase/decrease

The Articles of Association must stipulate the amount of share capital. The share 109 capital may be specified as a specific amount or as a minimum and maximum capital such that the minimum capital shall be at least one-quarter of the maximum capital. The minimum share capital of the public limited company is EEK 400,000 (approximately EUR 25,560). Ermo Kosk/Peeter Lepik

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110

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II. Public Limited Company

110 If the Articles of Association must be amended due to the increase or decrease of the share capital, amendment of the Articles of Association must be decided before the share capital is increased or decreased. Exception of this rule is made when an increase of share capital at least to the amount of minimum share capital enacted in law is decided concurrently with a reduction of share capital. 111 The share capital may be increased with or without supplementary contributions. Share capital may be reduced by a reduction of the nominal values of shares or by the cancellation of shares. 112 In general, the general meeting makes a resolution on the increase or decrease of the share capital. A resolution is adopted if at least two-thirds of the votes represented at the general meeting are in favour (if there are several classes of shares then at least twothirds of the votes represented of each class of shares shall be in favour). The Articles of Association may prescribe a greater majority requirement. 113 The Articles of Association may grant the supervisory board the right to increase the share capital to an amount prescribed in the Articles of Association. By granting this right to the supervisory board the resolution to increase share capital may be done faster and more flexibly than using the general meeting. There are three restriction enacted in law: (a) increase of the share capital may only be done by making contributions (the bonus issue is not allowed); (b) the right to increase the share capital may be granted for up to three years; (c) the share capital may not be increased by more than one-half of the share capital which existed at the time the supervisory board received the right to increase the share capital. 114 If the share capital is paid in full or a bonus issue is conducted, the management board shall submit a petition to the Commercial Register for entry of the increase of share capital. The petition must include following: (a) the resolution of the general meeting; (b) the protocol of the general meeting; (c) the new text of the Articles of Association if the Articles of Association is amended; (d) upon an increase of the share capital by new contributions, a bank notice concerning payment of the share capital; (e) upon a bonus issue, the annual report or interim balance sheet on which it is based; (f) upon payment by a non-monetary contribution, documents certifying the value of the contribution and its transfer; (g) a notice from the registrar of the Estonian Central Register of Securities confirming that the management board has notified the register of the increase in share capital. 115 The management board must submit a petition for entry of the increase of share capital in the Commercial Register within six months after adoption of the resolution on 128

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6. Management board

Estonia

116

increase of share capital. The petition for entry of the reduction of share capital in the Commercial Register shall be submitted not earlier than three months after publication of the reduction notices in the official publication Ametlikud Teadaanded (obligation to notify the creditors of the company). The share capital shall be deemed to be increased and the rights arising from the new 116 shares or shares with increased nominal value shall be deemed to have arisen as of the making of such entry in the Commercial Register. The share capital is reduced when entry is made in the Commercial Register.

6.

Management board

a)

Managing directors

The management board may have one member or several members. The Commercial 117 Code stipulates that the Articles of Association must set out the number of members of the management board, which may be expressed as a specific number or as a maximum and minimum number. In practice, number of directors is usually expressed as a maximum and minimum number because this allows flexibly change the number of directors when needed. A member of the management board must be a natural person with active legal capa- 118 city; the residence of at least one-half of the members of the management board must be in Estonia, state parties to the Agreement of the European Economic Area or in Switzerland. The Commercial Code stipulates list of persons who may not be a director: a member of 119 the supervisory board, a bankrupt or a person from whom the right to engage in economic activity has been taken away pursuant to law. The Articles of Association may also prescribe persons who can not be the members of the management board. Many other laws also describe restrictions for being a director (for example prohibition on business enacted in the Bankruptcy Act). The members of the management board are elected and removed by the supervisory 120 board. According to the Commercial Code, directors are elected for a term of three years, the Articles of Association may prescribe a shorter term. The supervisory board may remove a member of the management board any time regardless of the reason. The law does not stipulate any kind of compensations or guarantees for directors who are removed. The compensations and other rights are usually arising from a contract concluded between him or her and the company. The supervisory board decides on conclusion and terms and conditions of contract with 121 the members of the management board. The supervisory board must appoint a representative of the public limited company for the conclusion of the contract and conduct of the legal disputes. The contract concluded between director and company is in

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122

Estonia

II. Public Limited Company

essence an authorisation contract, which is mainly regulated by the Commercial Code (rights and obligations of the parties) and the Law of Obligations Act. b)

Management and representation

122 The management board is a directing body of the public limited company, which represents and directs the public limited company. The management board must, in directing, adhere to the lawful orders of the supervisory board. 123 Every director may represent the public limited company in all legal acts. The Articles of Association may prescribe that all or some of the members of the management board may represent the public limited company jointly. Joint representation shall apply with regard to third persons only if it is entered in the Commercial Register. It is also the only restriction of representation right that third persons must take into consideration when concluding a transaction. 124 The right of the management board to represent the public limited company may also be restricted by the Articles of Association or by a resolution of the supervisory board. A restriction on the right of representation shall not apply with regard to third persons. 125 According to the Commercial Code, transactions, which are beyond the scope of everyday economic activities, may only be concluded with the consent of the supervisory board. The registry card of part B of the card register in the Commercial Register, which is public, shall include information on the members of the management board. All entries are held as correct with regard to a third person, except if the third person knew or should have known that the entry is not correct. When directors are removed and new members of the board are elected but the entry to the register is not done yet, then it may be possible that the removed directors can still conclude transactions with third persons. In that case, all those transactions are valid. c)

Responsibilities and personal liability of managing directors

126 Some of the management board obligations concerning representing and directing the company are concretisized in the General Part of Civil Code Act and in the Commercial Code: (a) the diligence obligation is enacted in the General Part of Civil Code Act and according to that the management board shall perform obligations arising from law or the Articles of Association with diligence normally expected from a member of directing body; (b) the loyalty obligation for the members of the management board is mainly to avoid conflicts of interests of the directors and the company (this obligation is assured by many restrictions enacted in the Commercial Code, for example the prohibition of competition and loans); (c) the obligation to act in the most economically purposeful manner;

130

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6. Management board

Estonia

127

(d) the confidentiality obligation (obligation to preserve the business secrets of the company); (e) a special general meeting shall be called if the net assets of the company are less than one-half of the share capital or less than the minimum amount of share capital enacted in law; (f) an overview of the economic activities and economic situation shall be presented to the supervisory board at least once in every four months; (g) a notice to the supervisory board must be given immediately of any material deterioration of the economic condition or of any other important material circumstances related to the economic activities; (h) a bankruptcy petition of the company must be immediately submitted to a court if the company is insolvent and the insolvency, due to the company’s financial situation, is not temporary; (i) organising the accounting of the company is also an obligation of the management board; (j) all kind of petitions for the Commercial Register to make changes in the register are also submitted by the members of the management board (only petition to make entries concerning the members of the management board is submitted by the chairman of the supervisory board). When obligations of the members of the management board are violated then the 127 liability of directors may be civil, criminal or administrative. The civil liability is regulated in the Commercial Code and according to that the members of the management board who cause damage to the public limited company by violation of their obligations are solidarily liable for compensation for the damage caused. The general meeting or the supervisory board must make a decision on assertion of a claim against the member of the management board before any claim can be asserted by the public limited company. The limitation period for submission of claims against the member of the management board is five years. The company’s claim for payment of compensation for damage may also be submitted 128 by an obligee of the public limited company. That is possible when the assets of the public limited company are not sufficient to satisfy the claims of the obligee or the company has waived the claim against the director or has entered into a contract of compromise with him or her. According to the Taxation Act, the members of the management board are required to 129 ensure that the monetary and non-monetary obligations of the company arising from acts concerning a tax are performed within the set term and in full. The law also regulates the liability of the directors when the obligation mentioned is not fulfilled. If the director violates the obligations intentionally or due to gross negligence then he or she and the taxable company are solidarily liable for the tax arrears incurred as a result thereof. Offences against companies are enacted in the Penal Code. The criminal liability occurs 130 when the member of the management board: Ermo Kosk/Peeter Lepik

131

131

Estonia

II. Public Limited Company

(a) discloses or uses a business secret without a corresponding permission (confidentiality obligation); (b) fails to call a general meeting of shareholders when assets are less than one-half of the share capital or the assets are less than the minimum amount of share capital established by law; (c) fails to perform the obligation to submit a bankruptcy petition when the company is insolvent and the insolvency, due to the company’s financial situation, is not temporary; (d) fails to submit information or submits incorrect information to shareholders, auditors, persons conducting a special audit or to the public concerning the financial status of the company. d)

Other representatives of public limited company

131 The public limited company may grant procuration to one or many natural persons. Procuration is an authorisation which grants the representative of the undertaking (procurator) the right to represent the undertaking in all legal acts related to economic activities. The company may terminate procuration at any time. 132 A procurator may not be a member of the supervisory board or the auditor of the same company. 133 An entry concerning procuration is entered in the Commercial Register on the petition of the undertaking. A specimen signature of the procurator and the resolution of the supervisory board of the public limited company, which appointed the procurator, shall be appended to the petition. 134 The Commercial Code prohibits a procurator to transfer or encumber an immovable of the undertaking, which is also the restriction that applies with regard to third persons. The company may also apply other restriction. Procuration may be granted in such a manner that the procurator may represent the undertaking only jointly with another procurator (joint procuration) or with a member of the management board.

7.

Supervisory board

a)

Mandatory supervisory board

135 A public limited company shall have a supervisory board. The competence of the supervisory board is to plan the activities of the public limited company, organise the management of the company and supervise the activities of the management board. The supervisory board shall notify the general meeting of the results of a review. 136 The supervisory board determines the course of action for the public limited company, elects the members of the management board and supervises the activity of the management board. The supervisory board may not represent the company because the right to

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Estonia

137

do that is given only for the management board and according to the General Part of Civil Code Act the competence of a body of a legal person may not be transferred to any other body or person. b)

Composition and responsibilities

The supervisory board shall have three members unless the Articles of Association 137 prescribe a greater number. A member of the supervisory board must be a natural person with active legal capacity and may not be a member of the management board, a procurator, auditor, bankrupt or person from whom the right to engage in economic activity has been taken away pursuant to law. The Articles of Association may prescribe other persons who can not be the members of the supervisory board. The members of the supervisory board are elected and removed by the general meeting 138 for a term of five year unless the Articles of Association describe a shorter term. In order to elect a member of the supervisory board, his or her written consent is required. The members of the supervisory board may be removed by the general meeting any time and regardless of the reason. Similarly to the management board, the members of supervisory board have loyalty, 139 diligence and confidentiality obligations. The diligence obligation means that the supervisory board shall perform obligations arising from law or the Articles of Association with diligence normally expected from a member of supervisory board. The loyalty obligation includes a principle that the members of the supervisory board must avoid conflict of interest between personal and company’s interests. This obligation is assured by many restriction enacted in the Commercial Code (prohibition of competition, voting and loan; the general meeting decision for a transaction with a member of the supervisory board). The competition prohibition is enacted in the Commercial Code and stipulates that the 140 member of the supervisory board may not, without a resolution of the general meeting, be involved or work in the area of activity of the public limited company. The members of the supervisory board must preserve the business secrets of the company. The public limited company may not grant a loan to a member of supervisory board. A 141 member of the supervisory board may not participate in voting if the interests of the member of the supervisory board arising from a transaction are in conflict with the interests of the public limited company. The supervisory board gives orders to the management board for organisation of the 142 management of the public limited company. The consent of the supervisory board is required for conclusion of transactions, which are beyond the scope of everyday economic activities. The Commercial Code gives an example list of transaction, which need the consent of the supervisory board (for example, the acquisition or termination of holdings in other companies, the acquisition or transfer of an enterprise, the transfer or encumbrance of immovables or registered movables etc.).

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143

Estonia

II. Public Limited Company

143 In order to supervise activity of the management board, the supervisory board has the right to examine all documents and to audit the accuracy of accounting, the existence of assets and the conformity of the activities of the company with the law, the Articles of Association and resolutions of the general meeting. The supervisory board has also the right to obtain information concerning the activities of the company from the management board and to demand an activity report and preparation of a balance sheet. 144 The supervisory board decides on conclusion and terms and conditions of transactions with the members of the management board and on the conduct of legal disputes with the members of the management board. 145 The supervisory board also approves the annual budget of the public limited company. 146 The members of the supervisory board are also solidarily liable for any damage wrongfully caused by violation of the requirements of law or of the Articles of Association, or by failure to perform their obligations, in the same manner as the members of the management. A member of the supervisory board is released from liability if he or she maintained a dissenting opinion in the adoption of the resolution, which was the basis for the illegal activity. c)

Qualifications

147 The Commercial Code does not enact any qualification requirements for the member of the supervisory board. But it is still allowed to prescribe restrictions for persons who shall be the members of supervisory board in the Articles of Association. 148 It should be mentioned that for certain types of public limited companies the qualification requirements are stipulated in other acts. For example, the Credit Institutions Act allows only persons who have the education, experience and professional qualifications necessary to manage a credit institution and who have an impeccable business reputation to be elected as the members of the supervisory board. d)

Consultative/advisory council

149 The Commercial Code does not regulate the consultative/advisory council of the supervisory board. 150 But such councils are regulated in special acts for certain types of companies. The Credit Institutions Act allows the supervisory board of credit institution to form a committee for monitoring the activities of the management board (monitoring committee of the supervisory board) whose competence, rights and principles of activities are determined by the supervisory board.

134

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8. Selected capitalization and liability questions concerning the

8.

Selected capitalization and liability questions concerning the public limited company

a)

Prohibition of repayment of shareholder contributions

Estonia

151

A public limited company may only make payments to the shareholders from net profit 151 or from undistributed profit from previous financial years from which uncovered losses from previous years have been deducted. According to the Commercial Code, a contribution paid by a shareholder may not be refunded, nor any interest may be paid on a contribution. Payment of the purchase price by the public limited company upon repurchase of its 152 own shares is deemed not to be a refund of contribution. But the acquisition of own shares by the public limited company is exceptional and may only be done if: (1) this occurs within one year after adoption of the resolution of the general meeting which specifies the terms and conditions and term for the acquisition of shares and the sums to be paid for the shares; (2) the sum of the nominal values of the shares held by the public limited company does not exceed one-tenth of the share capital; (3) the shares are paid for from assets exceeding the share capital, reserve capital and premium. All payments made illegally to the shareholder must be returned as soon as a share- 153 holder becomes aware of the illegality of the payment. If the illegal payment is made by the fault of the members of the management board, the members of the management board who decided to make the payment are solidarily liable with the shareholder who receives the payment for returning the payment. b)

Capital substituting loans

A public limited company may not grant a loan to a person to acquire shares of the 154 public limited company. Prohibited are also loans to the shareholder whose shares represent more than 1 per cent 155 of the share capital, to a shareholder or member of its parent undertaking, whose shares represent more than 1 per cent of the share capital of the parent undertaking, to a member of its management board or supervisory board or its procurator. c)

Obligation to petition for insolvency proceedings

If the net assets of a public limited company are less than one-half of the share capital, 156 or less than the minimum amount of share capital provided by law, the general meeting must decide on submission of a bankruptcy petition. Instead of submitting the bankruptcy petition the general meeting may decide on a reduction or increase of share capital or the implementation of other measures as a result of which the net assets

Ermo Kosk/Peeter Lepik

135

157

Estonia

II. Public Limited Company

would thereby form at least one-half of the share capital and at least the minimum share capital provided by law. It is also possible to decide on dissolution, merger, division or transformation of the public limited company. 157 The management board has an obligation to submit immediately a bankruptcy petition to a court if the company is insolvent and the insolvency, due to the company’s financial situation, is not temporary. 158 According to the Penal Code, the members of the management board are criminally liable when they haven’t fulfilled their obligations concerning submission of bankruptcy petition (failure to call a general meeting of shareholders when net assets of the public limited company are less than one-half of the share capital, or less than the minimum amount of share capital or failure to perform the obligation to submit a bankruptcy petition).

9.

Accounting

a)

Bookkeeping and annual financial statements (publication obligations)

159 The management board organises the accounting of the public limited company and the supervisory board has the right to examine all documents of the public limited company and to audit the accuracy of accounting. 160 Accounting is mainly regulated in the Accounting Act and according to that the public limited company is required: (1) to organise its accounts in accordance with accounting principles generally accepted in Estonia or international financial reporting standards in such a way as to ensure the provision of up-to-date, relevant, objective and comparable information concerning the financial position, economic performance and cash flows of the accounting entity; (2) to document all its business transactions; (3) on the basis of source documents or summary documents prepared on the basis thereof, to post and record all its business transactions in accounting ledgers and journals; (4) to prepare and submit annual reports and other financial statements pursuant to the procedure provided for in the Accounting Act and other legislation; (5) to preserve accounting documents. 161 After the end of the financial year, the management board prepares the annual accounts and activity report pursuant to the procedure provided for in the Accounting Act. 162 According to the Accounting Act, an annual report consists of the annual accounts and the management report. The auditor’s report and the profit distribution proposal for the financial year must be annexed to the annual report.

136

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9. Accounting

Estonia

163

The preparation and submission of an annual report entails the following steps: (a) preparation of the annual accounts; (b) preparation of the management report; (c) auditing; (d) preparation of the profit distribution proposal for the financial year; (e) submission of the annual report for approval.

163

The management board submits the annual accounts and management report (annual 164 report), the auditor’s report and the profit distribution proposal to the general meeting. The management board must provide shareholders the opportunity to examine the annual report for at least two weeks before the general meeting. The supervisory board reviews the annual report and prepares a written report, which 165 will be presented to the general meeting. The supervisory board shall indicate in the report whether it approves the annual report prepared. In addition, the report shall indicate how the supervisory board has organised and directed the activities of the public limited company. The general meeting approves an annual report. After that the management board 166 submits the approved annual report to the Commercial Register together with the profit distribution proposal and the auditor’s report. An annual report must be submitted not later than six months after the end of the financial year. b)

Audit requirements

The general meeting, which also specifies the procedure for remuneration, specifies also 167 the number of auditors and appoints them. The written consent of a person is required for appointment of the person as auditor. After the annual accounts and activity report are prepared, the management board 168 must promptly present them to the auditor. Then the auditor audits the annual report and makes the auditor’s report, which will also be presented to the general meeting. Auditing is mainly regulated in the Authorised Public Accountants Act (adopted on 10 169 February 1999) and the Auditing Rules (adopted 15 June 2000) enacted by the Minister of Finance. The Auditing Rules include requirements for auditing and professional ethics based on the standards of the International Federation of Accountants. The auditing rules are prepared by the management board of the Board of Auditors and approved by a regulation of the Minister of Finance. Auditors have the right to perform audits. An auditor is a natural person who has 170 obtained the qualification of an auditor or a company of auditors entered in the list of auditors. Auditing means the examination of financial statements and the provision of an opinion pertaining thereto according to the auditing rules. An auditor must be independent and impartial in the professional activities and shall 171 operate solely pursuant to law, the auditing rules, the requirements of professional ethErmo Kosk/Peeter Lepik

137

172

Estonia

II. Public Limited Company

ics, and the resolutions and recommendations of the bodies of the Board of Auditors. An auditor may not operate in an area of activity, which may influence the auditor’s impartiality, nor is incompatible with good auditing practice. 172 An auditor must maintain the confidentiality of information, which has become known to the auditor in the course of the professional activities of the auditor. 173 If auditing is required by law, an auditor or a firm of auditors is liable for any damage wrongfully caused to a client or a third party as a result of violation of an obligation arising from the professional activities of the auditor or the firm of auditors. Any agreement on the restriction of liability of an auditor is void. c)

Disclosure

174 Before presenting the annual report to the general meeting the management board must provide shareholders the opportunity to examine the annual report for at least two weeks. 175 When the general meeting has approved annual report, the management board presents it to the Commercial Register together with the profit distribution proposal and the auditor’s report. After presenting the annual report to the Commercial Register everyone has the right to examine the business files, and to obtain copies of documents in the business files, which means that the annual report of the company is publicly accessible.

10. Taxation 176 Estonia does not levy corporate income tax on retained earnings. Corporate income tax is levied solely on distributions of corporate profits. Resident companies are subject to income tax (so-called “distribution tax”) on distributed profits, including transactions that are considered as hidden profit distributions (e.g. fringe benefits, gifts and donations, non-business expenses). In addition, companies are subject to social security contributions, land tax, value added tax and various excise taxes. Municipalities are authorized to introduce local taxes, most notably advertisement tax and sales tax. The importance of the local taxes, however, is very small. 177 Important features of the Estonian tax system have been harmonized with EU tax law, including direct taxes, mutual assistance and administrative cooperation. Application of corporate income tax solely to profit distributions, which is allegedly contrary to the EU Parent-Subsidiary Directive, shall be preserved at least until December 31, 2008, which is the end of the transition period granted by the EU to Estonia. 178 Tax residence of a company is determined on the basis of its incorporation: a company is resident in Estonia if it is incorporated under Estonian law. Any form of profit distribution is taxed at the rate of 24/76 of the net amount of distributed profits.

138

Ermo Kosk/Peeter Lepik

10. Taxation

Estonia

179

The main taxes that are applied for companies in Estonia are following: 179 (a) Corporate income tax. Income tax matters are regulated by the Income Tax Act. In Estonia, corporations are generally exempt from income tax on retained earnings. That is, no corporate income tax duty arises from the fact that a particular legal entity earns profit; income tax is, instead, tied to the distribution of profit. Estonia taxes income at a flat rate of 24/76 of the net distribution. (b) Value Added Tax. Value added tax is imposed on taxable supply, as defined in the Value Added Tax Act. Value added tax is applied as tax on added value, which effectively means that a tax-paying corporation is entitled to offset its VAT duty against the VAT already paid to other persons. VAT is, therefore, ultimately paid by the final stage consumers of the product. All persons involved in business whose annual taxable supply exceeds EEK 250,000 (equals approx. EUR 16,000) must register themselves as VAT taxpayers and declare and pay VAT. For those with more modest supply, registration is optional. The full VAT rate currently stands at 18% of the taxable value. Certain goods and services are currently charged with a 5% VAT (e.g. books, heat energy etc.). Other goods and services are zero-rated, and so is export. (c) Social Tax. Social Tax is regulated by the Social Tax Act. Corporations registered in Estonia must pay a 33% social tax on the following payments: wages and salaries paid to employees; payments to members of management, trustee in bankruptcy and members of the bankruptcy committee, where applicable; payments to natural persons on the basis of all kinds of service contracts; fringe benefits within the meaning of the Income Tax Act, expressed as a monetary value including income tax; other payments for performance of all kinds of work, not listed in the Social Tax Act. (d) Unemployment Contributions. Under Estonian law, the employers share the burden of the unemployment insurance with the employees. Unemployment insurance is provided for in the Unemployment Insurance Act. The burden of such unemployment contribution is divided between the employer and the employee. The employer pays the insurance premium at the rate of 0.25%-1%, where the exact rate is determined by the Government and is announced annually. Currently, employer pays 0.5% of the taxable basis. The taxable basis is generally wages and other payments made to the employees, except the payments made in accordance with the Labour Contract Act upon termination of the labour contract. (e) Land Tax. All owners of land (or, where appropriate, owners of a right of superficies or an usufruct) must pay a land tax of 0.1%-2.5% of its taxable value (except for the agricultural land, in case of which the rate is 0.1%-2.0 %). The exact rate of tax may differ according to location, and is set by the local governments annually. (f) Local Taxes. Local government bodies are authorised to impose local taxes in certain fields in accordance with the law. Local taxes are sales tax, boat tax, advertisement tax, road and street closure tax, motor vehicle tax, animal tax, entertainment tax and parking charge. Local authorities may choose to impose any, all or none of the above named taxes in accordance with the procedural requirements and maximum rates set out in the Local Taxes Act. Again, the importance of the local taxes is very small.

Ermo Kosk/Peeter Lepik

139

180

Estonia

II. Public Limited Company

11. Dissolution of a company/termination of the business 180 A public limited company may be dissolved by a resolution of the general meeting, by a court judgement and on other bases prescribed by law or the Articles of Association. 181 When shareholders decide to terminate the business then a dissolution resolution shall be adopted. At least two-thirds of the votes represented at the general meeting must be in favour to do that unless the Articles of Association prescribe a greater majority requirement. 182 A public limited company is dissolved by a court judgement (compulsory dissolution) if: (a) the general meeting does not adopt a dissolution resolution if its adoption is obligatory pursuant to law or the Articles of Association, the shareholders have not adopted any resolutions when the net assets of the public limited company are less than one-half of the share capital, or less than the minimum amount of share capital; (b) the general meeting has not been held during the last two financial years; (c) the term of authority of the management board expired more than two years previously and a new management board has not been elected; (d) the objective or activities of the company are contrary to law, public order or good morals; (e) the company was founded in material violation of the law or if the Foundation Agreement was adopted under circumstances due to which the agreement is void, and the corresponding violation cannot be subsequently eliminated; (f) the Articles of Association of the company are contrary to law to a significant extent; (g) the company does not comply with the requirements established for the legal person by law; (h) there are also other grounds for compulsory dissolution enacted in laws. 183 A court may set a term for company for elimination of the deficiencies before making the decision if the law allows that. 184 Company is liquidated upon dissolution according to proceedings enacted in the Commercial Code and in the General Part of Civil Code Act. In bankruptcy proceedings, a company is liquidated pursuant to the procedure provided for bankruptcy proceedings. Bankruptcy proceeding is regulated in the Bankruptcy Act (adopted on 22 January 2003). 185 The Commercial Code stipulates requirements for notification of creditors, notice of liquidation, submission and satisfaction of claims, distribution of assets, termination of legal person and other procedures for liquidation.

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12. Public limited company and limited partnership

Estonia

186

12. Public limited company and limited partnership a)

In general

A limited partnership may be founded by a natural persons or legal persons. There must 186 be at least two persons who operate under a common business name, and at least one of the persons (general partner) must be liable for the obligations of the limited partnership with all of his or her assets, and at least one of the persons (limited partner) must be liable for the obligations of the limited partnership to the extent of his or her contribution. A limited partnership shall operate on the basis of a partnership agreement concluded 187 by the partners. The partners shall agree on: (a) the business name and seat of the limited partnership; (b) the area or areas of activity of the limited partnership; (c) the amount of the contributions of the partners. The partners may also agree on other terms and conditions, which are not in conflict with the law. The partners shall make contributions in the amount prescribed by the partnership 188 agreement. A contribution may be monetary or non-monetary. A non-monetary contribution may also be the provision of services to the limited partnership, or the transfer to or use of assets by the limited partnership. The monetary value of a non-monetary contribution is determined by the partnership agreement. After concluding the partnership agreement, a petition for entry in the Commercial 189 Register shall be submitted. All partners must sign the petition. Passive legal capacity of a limited partnership arises as of entry of the company in the Commercial Register. Each general partner has the right and the obligation to participate in the management 190 of the limited partnership. A limited partner does not have the right to manage or to represent the limited partnership unless the partnership agreement prescribes otherwise. In managing the limited partnership, a managing partner may perform acts, which are necessary for the everyday economic activities. A resolution of the partners is required for the performance of acts, which are beyond 191 everyday economic activities. A limited partner may also participate in the decisionmaking of the partners. b)

Transfer of partnership interest, participation of new partners, withdrawal of partners and dissolution

A new partner may be admitted into a limited partnership only with the consent of all 192 partners. Upon the death of a partner, his or her successors have the right to join the limited partnership only if so prescribed by the partnership agreement or if all the partners agree to it. It should be noted that a person who becomes a general partner of a Ermo Kosk/Peeter Lepik

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193

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II. Public Limited Company

limited partnership is also liable for the obligations of the limited partnership, which arose before the person became a partner. 193 A partner may depart from the limited partnership at the end of the financial year by giving at least six months’ advance notice thereof. The partnership agreement may also prescribe a shorter term. The Commercial Code stipulates quite strict liability for the general partners who leave. Former partner will still be solidarily liable with the other partners for an obligation of the limited partnership which arose before entry of the departure or exclusion of the partner in the Commercial Register if the due date for performance of the obligation has arrived or arrives within five years after departure or exclusion. 194 Exclusion of partners may be demanded by other partners or by creditors of the limited partnership. Other partners may submit a petition to a court on exclusion of partner if he or she has violated material obligations that may cause dissolution of a company by a court judgement. Creditors of the company may submit a petition to a court on exclusion of the general partner if satisfaction of the claim from the assets of the partner is unsuccessful. In that case, the creditors may demand that the claim will be satisfied from the compensation payment to the partner. 195 Upon departure or exclusion of a partner from the limited partnership, the partner shall be paid a compensation, which the partner would receive if the company were dissolved. 196 If all the limited partners depart or are excluded from a limited partnership and at least two general partners remain, the limited partnership shall be deemed to be transformed into a general partnership without dissolution. Transformation shall be entered in the Commercial Register on the initiative of the registrar or on a petition of the general partnership. 197 A limited partnership may be dissolved by a resolution of the partners, by a court judgement, upon expiry of a term or achievement of an object. There may be also other grounds for dissolution. The partnership agreement may prescribe that the limited partnership is also dissolved upon departure of a partner from the general partnership, the bankruptcy of a partner or upon the death of a partner who is a natural person, or dissolution of a partner who is a legal person. c)

Taxation/accounting

198 Taxation is same for all companies, there are no differences. 199 A limited partnership has also accounting obligation like other legal persons. The partners approve the annual report of the limited partnership. The amount of the share of profit to be distributed among the partners shall be decided by the partners after the end of the financial year on the basis of the annual balance sheet.

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1. Character of Private Limited Company (Osahing)

Estonia

200

Generally auditing is not compulsory. The Accounting Act stipulates that accounting is 200 required if at the balance sheet date of the accounting year the company exceeds the limits of at least two of the three following criteria: (a) sales revenue (net turnover): EEK 6 million; (b) balance sheet total: EEK 3 million; (c) number of employees: 5. If a partner of the limited partnership is a public limited company, a copy of the signed 201 annual report must submitted to the Commercial Register for permanent preservation together with the auditor’s report, if auditing is compulsory, and the profit distribution proposal within six months as of the end of the financial year.

III. Private Limited Company 1.

Character of Private Limited Company (Osahing)

A private limited company is a company that has a share capital divided into the 202 private limited company shares. A shareholder will not be personally liable for the obligations of the company, and only a company is liable for the performance of its obligations with all of its assets. The share capital must be a minimum of EEK 40,000 (approximately EUR 2,556). The minimum nominal value of a share is EEK 100. Every shareholder can own only one 203 share, contrary to the stock company, where the number of shares permitted to be owned by one shareholder is unlimited. A shareholder may freely transfer a share to another shareholder. Upon transfer of a share to a third person, the other shareholders have the right of pre-emption.

2.

Formation

a)

Formation procedure

aa)

Execution of the formation documents

The foundation of a private limited company is similar to the foundation of a public 204 limited company without subscription for shares – conclusion of a Foundation Agreement and the Articles of Association, contributions for the shares, submitting an application and registration in the Commercial Register. In order to found a private limited company, the founders must conclude a Foundation 205 Agreement, which shall be attested by a notary. In case there is only one founder, this document is called a Foundation Resolution. Upon conclusion of a Foundation Agreement, the founders must approve the Articles of 206 Association of the private limited company as an annex. All founders shall sign the Ermo Kosk/Peeter Lepik

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Foundation Agreement and the Articles of Association approved thereby. A representative of a founder may sign the Foundation Agreement and the Articles of Association approved thereby if the authorisation document granted to the representative is notarised. 207 The founders must nominate the members of the management board and, if a supervisory board is formed, its members. That information shall also be included in the Foundation Agreement. 208 The Foundation Agreement must stipulate following information: (1) the business name, seat, address and area of activity of the private limited company being founded; (2) the names and residences or seats of the founders; (3) the proposed amount of share capital; (4) the nominal value and number of shares, and their division among the founders; (5) the amount to be paid for shares and the procedure, time and place of payment; (6) if a share is paid for by a non-monetary contribution, the item of the non-monetary contribution, its valuation method and value; (7) information on the members of the management board and, if a supervisory board is formed, on its members; (8) information on procurators or auditors, if appointed; (9) the projected costs of foundation and the procedure for payment thereof. 209 The Articles of Association enacts the basic corporate structure of the entity. This includes the business name, seat and area of activity of the private limited company, the amount of share capital which may be specified as a specific amount or as a minimum and maximum capital such that the minimum capital shall be at least one-quarter of the maximum capital. In addition, the Commercial Code stipulates that the Articles of Association must also include following: (a) the procedure for payment for shares; (b) the specific rights attaching to a share, or of a shareholder; (c) if a share is paid for by a non-monetary contribution, the valuation method of the non-monetary contribution; (d) the amount of reserve capital; (e) management board and if there is a supervisory board, the number of members thereof, which may be expressed as a specific number or a maximum and minimum number. 210 Aforesaid requirements for the Articles of Association are according to the Commercial Code mandatory but the Articles of Association may also prescribe other terms and conditions, which are not in conflict with the law. If a provision of the Articles of Association is in conflict with a provision of law, the provision of law is applied. 211 After concluding the Foundation Agreement, the Articles of Association and paying the share capital in full, the management board of the company submits an application of incorporation to the Commercial Register. It is required to submit an application for

144

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2. Formation

Estonia

212

entry in the Commercial Register within six months after conclusion of the Foundation Agreement. The application of incorporation must contain following information: (1) the business name of the private limited company; (2) the area of activity, seat and address of the private limited company; (3) the amount of share capital; (4) the date of conclusion of the Foundation Agreement; (5) the names, personal identification codes and residences of the members of the management board; (6) if the Articles of Association prescribe that all or some of the members of the management board may represent the private limited company jointly (according to law, every member of the management board may represent the company in all legal acts) then the members of the management board who can represent the company jointly; (7) the beginning and end of the financial year of the private limited company.

212

The Commercial Code demands that certain documents should also be submitted to the 213 Commercial Register as annexes to the application of incorporation: (a) the Foundation Agreement; (b) the Articles of Association; (c) a bank notice concerning the payment of share capital; (d) if there is a management board and auditors – the names, personal identification codes and residences of the members of the management board and the auditors; (e) specimen signatures of the members of the management board; (f) upon payment of a non-monetary contribution, the agreement for transfer of the contribution to the private limited company, the documents certifying the value of the contribution and an opinion on the valuation of the non-monetary contribution signed by the auditor if needed; (g) telecommunications numbers (telephone, facsimile, etc.). bb) Initial shareholder contributions and their payment prior to registration

The founders must pay for the shares in full before submission of an application for entry 214 of the private limited company in the Commercial Register. The Foundation Agreement may also prescribes an earlier due date. A contribution may be monetary or non-monetary. The share shall be paid for in money 215 unless the Articles of Association prescribe payment by a non-monetary contribution. The sum to be paid for a share may not be set off against salary, fees or other such payments by the private limited company being founded or against other claims against the company being founded. Upon foundation, the founders open a bank account in the name of the private limited 216 company, into which they pay their monetary contributions. Non-monetary contributions may be done if so described in the Articles of Association. 217 A non-monetary contribution may be any thing, which is monetarily appraisable and Ermo Kosk/Peeter Lepik

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III. Private Limited Company

transferable to the private limited company or a proprietary right, which may be the object of a claim. A non-monetary contribution may not be service or work provided to the company or the activities of the founders in the foundation of the private limited company. 218 The valuation method of a non-monetary contribution must be prescribed in the Articles of Association. The usual value of a thing or right shall be taken as the basis for the valuation of a non-monetary contribution. According to the General Part of Civil Code Act, the usual value of an object is its average local selling price (market price). If the value of a non-monetary contribution exceeds EEK 40,000 or if all non-monetary contributions collectively form more than one-half of the share capital, an auditor audits the valuation and presents an opinion. An opinion of auditor must set out: (a) whether the contribution is a thing, which is monetarily appraisable and transferable to the private limited company or a proprietary right, which may be the object of a claim and whether the contribution meets other requirements described foregoing; (b) a description of the non-monetary contribution; (c) the method which was used upon valuation; (d) whether the value of the non-monetary contribution corresponds to the nominal value and issue premium of the share paid for by the non-monetary contribution. 219 The Articles of Association may prescribe that a shareholder who does not pay for the share on time is required to pay a interest for delay at the rate prescribed by the Articles of Association. The management board must send him or her notice demanding payment by the term specified in the letter (must be at least one month), indicating that the shareholder will lose the share if payment is not made. If the shareholder does not pay the deficient sum during the term, he or she will lose the share. b)

Registration procedure/the Commercial Register

220 The management board is required to submit an application of incorporation in the Commercial Register within six months after conclusion of the Foundation Agreement or the Foundation Resolution. The registrar will not make an entry in the register if the application or documents appended thereto do not comply with the law or are submitted after the term prescribed by law. 221 Before filing an application of incorporation to the Commercial Register the contributions for shares must be paid. According to the Estonian Central Register of Securities Act, it is also possible to register shares of private limited company in the Central Register of Securities if founders want that. In that case, all shares must be registered. 222 It is required to submit the documents which are the basis for an entry (formation documents, 2.a)aa)) and specimen signatures to the registrar. The specimen signatures must be notarised. The registrar may also demand supplementary documents from the undertaking if these are necessary to determine the facts that are the basis for an entry. 146

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2. Formation

Estonia

223

The registrar does not have the right to decline to make an entry if all documents 223 required by law are submitted, and they comply with the requirements of law. The documents submitted to the registrar shall be originals or notarised copies unless 224 otherwise provided by law. All documents must be in Estonian, documents in a foreign language shall be submitted to the registrar together with a notarised translation. Documents are reviewed and judgements on entries are made by way of written proceedings. The registrar in whose territorial jurisdiction the seat of a company is located makes the 225 entries in the Commercial Register. After review of an application, the competent person shall make a judgement on entry, which satisfies the petition or denies it. An entry in the Commercial Register enters into force upon signature by the person enforcing the judgement on entry and by the person who is competent to make the judgement on entry. After the company is registered in the Commercial Register, it becomes a legal entity 226 and acquires full legal capability. c)

Approval requirements

The registrar does not have the right to decline to make an entry if all documents 227 required by law are submitted, and they comply with the requirements of law. The registrar may also demand supplementary documents from the undertaking if these are necessary to determine the facts that are the basis for an entry. Before making an entry the registrar checks that all documents contain the information 228 prescribed by law. The registrar will verify that the business name is in conformity with the requirements of law. If an entry in the Commercial Register is applied for with regard to an area of activity for which an activity licence is required, such licence shall be submitted to the registrar in advance. d)

Shelf companies

There are no restrictions concerning the foundation of shelf companies. As an alter- 229 native to founding a new company it is possible to buy so called shelf company. e)

Cost/Duration

The registration procedure itself takes usually about 3-4 weeks. According to the 230 Commercial Code, an entry order shall be made within 15 days from the day when the application was submitted. The chief judge of the county or city court, which maintains the Commercial Register, may, on the existence of circumstances requiring special investigation, extend the term by up to thirty days.

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147

231

Estonia

III. Private Limited Company

231 After the judgement on entry is made, the registrar shall enter the text of the entry on the registry card. The text of the entry shall be signed by the person enforcing the judgement and by the person competent to make the judgement. 232 According to the State Fees Act, the state fee to be paid for the entry of a private limited company in the Commercial Register is in the amount of 0.2 per cent of the share capital but not less than EEK 3000 (approximately EUR 192) and not more than EEK 20,000 (approximately EUR 1282). 233 A notary fee for the Foundation Agreement/Foundation Resolution and the Articles of Association depends on the bigness of share capital of the private limited company. The Notary Fees Act stipulates a table of transaction values and the notary fees for those values. When a company is founded, the transaction value equals the bigness of share capital. The maximum transaction value taken into account when calculating the notary fee is EEK 10,000,000 (approximately EUR 641,025). When one person concludes the Foundation Resolution then the notary fee is the sum enacted in the table of transaction values but if there are more than one founder and the Foundation Agreement is concluded then the notary fee is doubled. 234 For a private limited company with the minimum share capital EEK 40,000 the notary fee for the Foundation Resolution and the Articles of Association is EEK 330 (approximately EUR 21). But when there are many founders who conclude the Foundation Agreement and the Articles of Association then the notary fee will be doubled (EEK 660). 235 The notary fee charged for the Foundation Agreement /Foundation Resolution and the Articles of Association covers the fee for legal consultations and drafting of documents, the fee for sending the documents to the Commercial Register and giving petitioner a copy of the judgement on entry concerning the application, the court ruling and the notice of the making of an entry. f)

Requested information on business letters

236 The commercial documents of the undertaking shall indicate the business name, seat and commercial registry code of the undertaking.

3.

The shareholder

a)

Rights and duties of a shareholder

237 The main principle is that the shareholders shall be treated equally under equal circumstances (equality treatment principle). Shareholders’ rights arise from law and the Articles of Association. 238 According to the Commercial Code, a share grants the shareholder the right to participate in the management of the private limited company and in the distribution of 148

Ermo Kosk/Peeter Lepik

3. The shareholder

Estonia

239

profit and of remaining assets on dissolution of the company. The shareholder has also the right to examine the list of shareholders and the right to information. One of the most important rights is the right to receive information from the management board on the activities of the company and to examine the documents of the company. The right to information is much wider than in the public limited company. Once a year, on the basis of the approved annual balance sheet, the company may pay 239 dividends to the shareholders from net profit or from undistributed profit from previous years from which losses from previous years have been deducted. Dividends shall be paid in proportion to the nominal value of the shareholder’s share unless the Articles of Association prescribe otherwise. A shareholder has also the right to file a claim to court to declare invalid a resolution of 240 the shareholders, which is in conflict with the law or the Articles of Association. The request must be submitted within three months after adoption of the resolution. Shareholders’ right may also depend on the amount of share capital owned. a) The shareholders who own at least 1/10 of the share capital may demand: – calling a meeting of shareholders; – with good reason, the removal of a member of the management or supervisory board by a court; – a resolution on conduct of a special audit on matters regarding the management or financial situation of the company, and the appointment of an auditor by a resolution of the shareholders; – appointment of liquidators by a court. b) The shareholders who own at least 1/4 of the share capital may demand a special audit and appointing an auditor for the special audit by a court. c) The shareholders who own at least 1/2 of the share capital may demand a resolution of the shareholders meeting on exclusion of a shareholder. After that the private limited company may present a petition to a court. A court may exclude a shareholder from the company if the shareholder fails to perform the shareholder’s obligations to a material extent or in any other way significantly damages the interests of the company, or does not perform obligations or terminate damage regardless of a written caution from the company.

241

According to the General Part of Civil Code Act, the shareholders of a company must 242 act in accordance with the principle of good faith and consider each other’s legitimate rights in their mutual relations. The shareholders shall follow the interests of the private limited company when voting. A shareholder is liable for any damage wrongfully caused to the private limited com- 243 pany, another shareholder or a third person, in the capacity of shareholder. He or she is not liable for the damage if he or she did not participate in the adoption of the resolution or voted against it.

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149

244

b)

Estonia

III. Private Limited Company

Shareholder resolutions /shareholder meetings

244 The competence of shareholders in enacted in the Commercial Code and according to that the shareholders may adopt resolutions on the conceptual matters for the private limited company. The shareholders are competent to: (1) amend the Articles of Association; (2) increase and reduce the share capital; (3) elect and remove the members of the supervisory board and if the private limited company does not have a supervisory board, elect and remove the members of the management board; (4) approve the annual report and distribute profit; (5) divide shares; (6) elect an auditor; (7) designate a special audit; (8) if the company does not have a supervisory board, appoint and remove procurators; (9) decide on assertion of a claim against a member of the management board or supervisory board, or a shareholder; (10) decide on dissolution, merger, division or transformation of the company; (11) decide on other matters placed in the competence of the shareholders by law or the Articles of Association. 245 It is very important that the Commercial Code allows the shareholders to adopt resolutions on matters within the competence of the management board or the supervisory board. In such case, the shareholders are liable in the same manner as the members of the management board or the supervisory board. This rule does not have to be included in the Articles of Association. 246 The shareholders may adopt resolutions at a meeting or without calling meeting. In the cases provided by law, the shareholders may only adopt resolutions at the meeting of shareholders. In practice, resolutions are usually adopted at the shareholders meeting. The number of votes of a shareholder must be proportional to the amount of the shareholder’s share. 247 The management board calls a meeting of shareholders for approval of the annual report and distribution of profits or if the net assets of the company are less than one-half of the share capital or less than the minimum amount of share capital. A meeting of shareholders must also be called if the supervisory board, auditor or shareholders whose shares represent at least one-tenth of the share capital demand this. 248 A meeting of shareholders is competent to adopt resolutions if the represented votes represent over one-half of the shares. The Articles of Association may prescribe a greater representation requirement. 249 The shareholders have also the right to adopt resolutions without calling a meeting of shareholders. In that case, the management board will send a written draft of the resolution to all shareholders, specifying the term during which the shareholder must present the shareholder’s written position on it. If a shareholder does not give notice, 150

Ermo Kosk/Peeter Lepik

4. The private limited companies share

Estonia

250

it shall be deemed that the shareholder votes against the resolution. The resolution is adopted if over one-half of the votes of the shareholders are in favour. After that the management board prepares a record of voting and will send it to the shareholders.

4.

The private limited companies share

a)

Classes of shares

A private limited company is a company which has share capital divided into the 250 private limited company shares. The minimum nominal value of a share is EEK 100. The shares may have the same or different nominal values but the nominal value shall be a multiple of EEK 100. Each shareholder may have only one share. If a shareholder acquires an additional 251 share, the nominal value of the initial share shall increase accordingly. The Commercial Code does not stipulate different classes of shares for the private 252 limited company but allows to enact in the Articles of Association the specific rights attaching to a share, or of a shareholder. b)

Transfer of shares

A shareholder may freely transfer a share to another shareholder. But upon transfer of a 253 share to a third person, the other shareholders have a right of pre-emption for one month after presentation of the transfer agreement. The seller shall submit the contract of sale to the management board of the company who shall promptly notify the other shareholders of entry into the contract of sale. The provisions of the Law of Obligations Act concerning right of pre-emption are applicable. Objective of this pre-emptive right is to allow the shareholders to decide who can be a shareholder of the company. The Commercial Code allows to prescribe a different procedure for the share transfer in 254 the Articles of Association. For example, it is possible to stipulate in the Articles of Association that shareholder may transfer a share only if the shareholders resolution allows it or that the shareholder must make an offer to other shareholders before he or she can sell the share. A share transfer contract must be notarised. The seller and new owner of the share must 255 notify the management board of the company of the share transfer and submit the transfer agreement. The management board enters the new shareholder in the list of shareholders and deletes the previous shareholder or adds the transferred share to the share of a shareholder who exercised the right of pre-emption. For the purpose of the company, the share is deemed to be transferred as of amendment of the list of shareholders. The new shareholder may use shareholders rights when he or she is entered in the list of shareholders.

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256

Estonia

III. Private Limited Company

256 The notary who notarised the transfer of a share sends a notarised copy of a contract to the registrar of the Commercial Register. Transfer contracts are kept in the business files and are public. 257 If the shares are entered in the Estonian Central Register of Securities then the transfer contract does not have to be notarised. The parties of transfer contract do not have to notify the company of the share transfer or submit the transfer agreement to the management board unless other shareholders have the right of pre-emption. 258 When a shareholder wants to transfer a part of the share then the consent of the other shareholders is needed. The consent of the company is expressed by a resolution of the shareholders. c)

Own shares

259 As a general rule, a private limited company may not acquire or take as security its own shares. The Commercial Code stipulates a prohibition to acquire own share upon foundation of the company or an increase of share capital by company itself or through a third person acting in its own name but at the expenses of the company. 260 The acquisition of own shares is permitted by the Commercial Code if: (1) this occurs within one year after adoption of a resolution of the shareholders which specifies the terms and conditions and term for the acquisition and the sums to be paid; and (2) the share is paid for from assets exceeding the share capital, reserve capital and premiums; (3) own shares must be transferred within one year after the acquisition. If the shares are not transferred during that term the shares must be cancelled and the share capital shall be reduced accordingly. 261 It should be noted that the private limited company’s own share shall not grant the company any rights of a shareholder. 262 A subsidiary may acquire shares of its parent undertaking under the same terms and conditions as its own shares.

5.

The Articles of Association

a)

Mandatory content

aa)

Company name

263 A business name is a name under which an undertaking operates and it is entered in the Commercial Register. The private limited company's business name is a mandatory content of the Articles of Association and it must be also included in the Foundation Agreement. An undertaking has the exclusive right to the business name of the undertaking. 152

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5. The Articles of Association

Estonia

264

The private limited company may only have one business name like other companies in 264 Estonia and the name shall include appendage ,,osau¨hing‘‘ [private limited company] or abbreviation of it ,,OU¨‘‘. The appendages and abbreviations may only be used at the beginning or end of the business name. In general terms, an undertaking may freely choose a business name. The Commercial 265 Code enacts some restrictions for choosing the business name. Some of them are following: (1) In practice, the most important requirement is that the business name must be clearly distinguishable from other business names entered in the Commercial Register in Estonia and from other business names deleted from the Commercial Register less than three years ago. Desirably the business name should be checked from the Centre of Registers (Ministry of Justice). Verifying the right to start using the business name by an undertaking is regulated by the Decree of the Minister of Justice and according to that request may be done by an e-mail, fax or by post. It must be noted that the reply from the Centre of Registers may not give definite opinion because the decision whether the name is clearly distinguishable or not is done by a court. In addition, everybody can check the business name's originality from the central database of the Centre of Registers which is accessible in webpage http://info.eer.ee. (2) A protected trademark in Estonia can not be used as a business name unless the undertaking is engaged in an area of activity in respect of which the trademark is not protected. It is possible to use protected trademark if the owner of the trademark gives a notarised consent. (3) A business name should not be misleading with regard to the legal form, area of activity or scope of activity of the undertaking. In practice, common faults are appendages in a foreign language (Ltd, GmbH, &Co, PLC, Corporation, OY). (4) A business name shall not be contrary to good morals. (5) The names of state and local government bodies and agencies shall not be used in a business name. The words ‘‘riigi’’ [state], ‘‘linna’’ [city] and ‘‘valla’’ [rural municipality], and other words which refer to the participation of a local government may be used in the business name of a company only if the state or local government holds more than one-half of the shares of the company. bb) Registered seat

According to the Commercial Code, the seat of business of legal person is mandatory 266 content of the Articles of Association. The seat of the private limited company will also be entered in the Commercial Register. Definition for the seat of a legal person is given in the General Part of Civil Code Act 267 and according to that it is the location of the management board. It must be noted that the seat may be different than the place of business of a legal person. The place of business is the place where the permanent and continuous economic activity of the company or other activities specified in the Articles of Association are carried out. The company may have many places of business, those are not entered in the Commercial Register and are not mandatory content of the Articles of Association.

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268

Estonia

III. Private Limited Company

The seat of the company is important when registering the company because according to the Commercial Code entries in the Commercial Register are done by the registrar in whose territorial jurisdiction the seat of a company is located (at the moment there are four Registration Departments in Estonia). If the seat of a company changes and the new seat is in the territorial jurisdiction of another registrar, the registrar of the new seat opens a registry card and note thereon the valid entries and also the invalid entries necessary to understand the valid entries. cc)

Business objective

268 The Commercial Code demands that the areas of activity shall be included in the Articles of Association and those are also registered in the Commercial Register. If in general the data included in the Commercial Register has a legal meaning then the areas of activity is the only exception. A company may operate in the areas of activity in which operation is not prohibited by law and this does not depend on whether the activity is registered in the Commercial Register or included in the Articles of Association. The Commercial Code enacts some restrictions. There are many areas of activity for which a license is required or in which only a particular class of undertaking may operate (for example weapon and medication commerce; international auto transportation services; air, railroad and sea transport; security services; medicine; alcohol and tobacco; telecommunication, etc.). The activities that are not allowed are the criminal activities or activities that may be against good morals. If an entry in the Commercial Register is applied for with regard to an area of activity for which an activity licence is required, such licence shall be submitted to the registrar in advance. Usually when company hasn’t registered yet, a temporary licence may be given for registration. The regulation of the areas that need licences is quite complicated because regulations are enacted in many different acts and decrees. The area of activity indicated in the Articles of Association of a company and in the entry in the Commercial Register concerning the area of activity of an undertaking may not be misleading with regard to the type or scope of activity of the undertaking. This provision is not widely used by the registrar but mainly it means that the area of activity shall not be too widespread (for example “business activity”). dd) Share capital and amount of shareholder contributions

269 The Articles of Association of the private limited company shall set out the amount of share capital which may be specified as a specific amount or as a minimum and maximum capital such that the minimum capital shall be at least one-quarter of the maximum capital. The share capital of the private limited company must be at least EEK 40,000 (approximately EUR 2556). 270 The Articles of Association must stipulate the procedure for payment for shares.

154

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5. The Articles of Association

Estonia

271

It is important that a non-monetary contribution for shares may only be done if so 271 prescribed in the Articles of Association. If a share is paid for a non-monetary contribution, the valuation method of the non-monetary contribution shall also be stipulated in the Articles of Association. b)

Additional provisions of the Articles of Association

The Commercial Code stipulates that in addition to foregoing content the Articles of 272 Association must include also: (a) the specific rights attaching to a share, or of a shareholder (if there are any); (b) the amount of reserve capital; (c) if there is a management board and supervisory board, the number of members thereof, which may be expressed as a specific number or a maximum and minimum number. The Articles of Association may also prescribe other terms and conditions that are not 273 in conflict with the law. If a provision is in conflict with a law, the law shall apply. The law enacts that certain provisions may only be validated in the Articles of Asso- 274 ciation. For example, if so prescribed in the Articles of Association, the private limited company may issue shares with greater issue price than its nominal value (premium). The Articles of Association may prescribe that a shareholder who does not pay for the shareholder’s share on time is required to pay interests, a procedure for share transfer that differs from the provisions enacted in law (right of pre-emption) etc. When regulating other matters in the Articles of Association which are not enacted in 275 the law, it must be noted that the condition may not be in contradiction with the general principles of the Commercial Code and with the principle that the shareholders shall be treated equally under equal circumstances. c)

Amendment of the Articles of Association

aa)

Formally recorded shareholder resolution

According to the Commercial Code, the amendment the Articles of Association is in 276 shareholders’ competent. The amendments may be done by the shareholders’ resolution, which may be adopted at the meeting of shareholders, or without calling the meeting. If generally a resolution of a shareholders is adopted when over one-half of the votes 277 represented at the shareholders meeting or one-half of the shareholders when voting without meeting are in favour then law prescribes a greater majority requirement for amending the Articles of Association. A resolution on amendment of the Articles of Association is adopted if at least two-thirds of the votes represented at the shareholders meeting are in favour. If the adoption of resolution is decided without calling the shareholders meeting then at least two-thirds of all shareholders must be in favour. The Articles of Association may prescribe a greater majority requirement.

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278

Estonia

III. Private Limited Company

278 All requirements enacted in the Commercial Code and in the Articles of Association concerning procedure of calling and proceeding the shareholders’ meeting and voting regulations concerning adopting the resolutions without calling the meeting must be followed. bb) Registration with the Commercial Register

279 The petition submitted to the Commercial Register to change the Articles of Association must also include the resolution of shareholders on amendment of the Articles of Association, the transcript of the general meeting or the record of voting and the new text of the Articles of Association. The transcript of a meeting of shareholders must include a complete list of shareholders which sets out the number of votes of each shareholder. 280 A resolution on amendment of the Articles of Association enters into force as of the making of a corresponding entry in the Commercial Register. d)

Capital increase/decrease

281 The Articles of Association must stipulate the amount of share capital. The share capital may be specified as a specific amount or as a minimum and maximum capital such that the minimum capital shall be at least one-quarter of the maximum capital. The minimum share capital of the private limited company is EEK 40,000 (approximately EUR 2556). 282 If the Articles of Association must be amended due to the increase or decrease of the share capital, the amendment of the Articles of Association must be decided before the share capital is increased or decreased. A exception of this rule is made when an increase of share capital at least to the amount of minimum share capital enacted in law is decided concurrently with a reduction of share capital. 283 The share capital may be increased with or without supplementary contributions. The share capital may be reduced by a reduction of the nominal values of shares or by the cancellation of shares. 284 The meeting of shareholders adopts a resolution on increase or decrease of the share capital. The shareholders’ resolution may also be done without calling the meeting. A resolution is adopted if at least two-thirds of the votes represented at the meeting are in favour (if the resolution is adopted without calling the meeting of shareholders then at least two-thirds of the shareholders shall be in favour). The Articles of Association may prescribe a greater majority requirement. 285 The management board must submit a petition for entry of the increase of share capital in the Commercial Register within six months after adoption of the resolution on increase of share capital. A petition for entry of the reduction of share capital in the Commercial Register shall be submitted not earlier than three months after publication of the reduction notices in the official publication Ametlikud Teadaanded (obligation to notify creditors of the company). 156

Ermo Kosk/Peeter Lepik

6. Management board

Estonia

286

The share capital shall be deemed to be increased and the rights arising from the new 286 shares or shares with increased nominal value shall be deemed to have arisen as of the making of such entry in the Commercial Register. The share capital is reduced when the entry is made in the Commercial Register.

6.

Management board

a)

Managing directors

The management board may have one member or several members. The Commercial 287 Code stipulates that the Articles of Association must set out the number of members of the management board, which may be expressed as a specific number or as a maximum and minimum number. In practice, the number of directors is usually expressed as a maximum and minimum number because this allows flexibly change the number of directors when needed. A member of the management board must be a natural person with active legal capa- 288 city; the residence of at least one-half of the members of the management board must be in Estonia, state parties to the Agreement of the European Economic Area or in Switzerland. The Commercial Code stipulates list of persons who may not be a director: a member of 289 the supervisory board, a bankrupt or a person from whom the right to engage in economic activity has been taken away pursuant to law. The Articles of Association may also prescribe persons who can not be the members of the management board. Many other laws also describe restrictions for being a director (for example prohibition on business enacted in the Bankruptcy Act). In general, the members of the management board are elected and removed by the 290 shareholders. If the private limited company has a supervisory board then the members of the management board are elected and removed by the supervisory board. According to the Commercial Code, directors are elected for a term of three years, the Articles of Association may prescribe a shorter term. The shareholders may remove a member of the management board any time regardless of the reason. If the company has a supervisory board then the supervisory board removes the members of the management. The law does not stipulate any kind of compensations or guarantees for the directors who are removed. The compensations and other rights are usually arising from a contract concluded between the member of the management board and the company. The shareholders (or the supervisory board if the company has it) must also decide on 291 conclusion and terms and conditions of the contract with the members of the management board. The shareholders must appoint a representative of the private limited company for the conclusion of the contract and conduct of the legal disputes. The contract concluded between the director and the company is in essence an authorisation contract, which is mainly regulated by the Commercial Code (rights and obligations of the parties) and the Law of Obligations Act. Ermo Kosk/Peeter Lepik

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292

b)

Estonia

III. Private Limited Company

Management and representation

292 The management board is a directing body of the private limited company, which represents and directs the private limited company. The management board must, in directing, adhere to the lawful orders of the supervisory board (if the company has the supervisory board). 293 Every director may represent the private limited company in all legal acts. The Articles of Association may prescribe that all or some of the members of the management board may represent the private limited company jointly. Joint representation shall apply with regard to third persons only if it is entered in the Commercial Register. It is also the only restriction of representation right that third persons must take into consideration when concluding a transaction. 294 The right of the management board to represent the private limited company may also be restricted by the Articles of Association. A restriction on the right of representation shall not apply with regard to third persons. 295 The registry card of part B of the card register in the Commercial Register, which is public, shall include information on the members of the management board. All entries are held as correct with regard to a third person, except if the third person knew or should have known that the entry is not correct. When the directors are removed and new members of the board are elected but the entry to the register is not done yet, then it may be possible that the removed directors can still conclude transactions with third persons. In that case, all those transactions are valid. c)

Responsibilities and personal liability of managing directors

296 Some of the management board obligations concerning representing and directing the company are concretized in the General Part of Civil Code Act and in the Commercial Code: (a) the diligence obligation is enacted in the General Part of Civil Code Act and according to that the management board shall perform obligations arising from law or the Articles of Association with diligence normally expected from a member of directing body; (b) the loyalty obligation for the members of the management board is mainly to avoid conflicts of interests of the directors and the company (this obligation is assured by many restrictions enacted in the Commercial Code, for example the prohibition of competition and loans); (c) the confidentiality obligation (obligation to preserve the business secrets of the company); (d) a meeting of shareholders shall be called if the net assets of the company are less than one-half of the share capital or less than the minimum amount of share capital enacted in law; (e) if the company has a supervisory board – an overview of the economic activities and economic situation shall be presented to the supervisory board at least once in every four months; a notice to the supervisory board must be given immediately of any 158

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6. Management board

Estonia

297

material deterioration of the economic condition or of any other important material circumstances related to the economic activities; (f) a bankruptcy petition of the company must be immediately submitted to a court if the company is insolvent and the insolvency, due to the company’s financial situation, is not temporary; (g) organising the accounting of the company is also an obligation of the management board; (h) all kind of petitions for the Commercial Register to make changes in the register are also submitted by the members of the management board. When obligations of the members of the management board are violated then the 297 liability of directors may be civil, criminal or administrative. The civil liability is regulated in the Commercial Code and according to that the 298 members of the management board who cause damage to the private limited company by violation of their obligations are solidarily liable for compensation for the damage caused. The shareholders must make a decision on assertion of a claim against the member of the management board. The limitation period for submission of claims against the member of the management board is five years. The company’s claim for payment of compensation for damage may also be submitted 299 by an obligee of the private limited company. That is possible when the assets of the private limited company are not sufficient to satisfy the claims of the obligee or the company has waived a claim against the director or has entered into the contract of compromise with him or her. According to the Taxation Act, the members of the management board are required to 300 ensure that the monetary and non-monetary obligations of the company arising from acts concerning a tax are performed within the set term and in full. Law also regulates the liability of the directors when the obligation mentioned is not fulfilled. If the director violates the obligations intentionally or due to gross negligence then he or she and the taxable company are solidarily liable for the tax arrears incurred as a result thereof. Offences against companies are enacted in the Penal Code. The criminal liability occurs 301 when the member of the management board: (a) discloses or uses a business secret without a corresponding permission (confidentiality obligation); (b) fails to call a meeting of shareholders when assets are less than one-half of the share capital or the assets are less than the minimum amount of share capital established by law; (c) fails to perform the obligation to submit a bankruptcy petition when the company is insolvent and the insolvency, due to the company’s financial situation, is not temporary; (d) fails to submit information or submits incorrect information to shareholders, auditors, persons conducting a special audit or to the public concerning the financial status of the company. Ermo Kosk/Peeter Lepik

159

302

d)

Estonia

III. Private Limited Company

Other representatives of private limited company

302 The private limited company may grant procuration to one or many natural persons. Procuration is an authorisation, which grants the representative of the undertaking (procurator) the right to represent the undertaking in all legal acts related to economic activities. The company may terminate the procuration at any time. 303 A procurator may not be a member of the supervisory board or the auditor of the same company. 304 An entry concerning procuration is entered in the Commercial Register on the petition of the undertaking. A specimen signature of the procurator and the resolution of shareholders (or the resolution of the supervisory board if the company has it), which appointed the procurator, shall be appended to the petition. 305 The Commercial Code prohibits the procurator to transfer or encumber an immovable of the undertaking, which is also the restriction that applies with regard to third persons. The company may also apply other restriction. Procuration may be granted in such a manner that the procurator may represent the undertaking only jointly with another procurator (joint procuration) or with a member of the management board.

7.

Supervisory board

a)

Mandatory/optional supervisory board

306 In general, the supervisory board is optional for the private limited company. A private limited company must have a supervisory board if the share capital is greater than EEK 400,000 and the management board of the private limited company has less than three members, or if so prescribed by the Articles of Association. The provisions of the Commercial Code concerning the supervisory board of a public limited company shall correspondingly apply to the competence and activity of the supervisory board of the private limited company. Please see chapters 7a)-7d) regarding the public limited company’s supervisory board.

8.

Selected capitalization and liability questions concerning the private limited company

a)

Prohibition of repayment of shareholder contributions

307 A private limited company may only make payments to the shareholders from net profit or from undistributed profit from previous financial years from which uncovered losses from previous years have been deducted. According to the Commercial Code, a contribution paid by a shareholder may not be refunded. 160

Ermo Kosk/Peeter Lepik

8. Selected capitalization and liability questions concerning the plc

Estonia

308

Payment of the purchase price by the company upon repurchase of its own shares is 308 deemed not to be a refund of contribution. But the acquisition of own shares by the private limited company is exceptional and may only be done if: (1) this occurs within one year after adoption of the resolution of the shareholders which specifies the terms and conditions and term for the acquisition and the sums to be paid; (2) the share is paid for from assets exceeding the share capital, reserve capital and premiums; (3) own shares must be transferred within one year after the acquisition. If the shares are not transferred during that term the shares must be cancelled and the share capital shall be reduced accordingly. All payments made illegally to the shareholder must be returned as soon as a share- 309 holder becomes aware of the illegality of the payment. If the illegal payment is made by the fault of the members of the management board, the members of the management board who decided to make the payment are solidarily liable with the shareholder who receives the payment for returning the payment. b)

Capital substituting loans

A private limited company may not grant a loan to a person to acquire shares of the 310 private limited company. Prohibited are also loans to the shareholder whose shares represent more than 5 per cent 311 of the share capital, to a shareholder or member of its parent undertaking, whose shares represent more than 5 per cent of the share capital of the parent undertaking, to a member of its management board or supervisory board or its procurator. c)

Obligation to petition for insolvency proceedings

If the net assets of a private limited company are less than one-half of the share capital, 312 or less than the minimum amount of share capital provided by law, the shareholders must decide on submission of a bankruptcy petition. Instead of submitting the bankruptcy petition the shareholders may decide on a reduction or increase of share capital or the implementation of other measures as a result of which the net assets would thereby form at least one-half of the share capital and at least the minimum share capital provided by law. It is also possible to decide on dissolution, merger, division or transformation of the private limited company. The management board has an obligation to submit immediately a bankruptcy petition 313 to a court if the company is insolvent and the insolvency, due to the company’s financial situation, is not temporary. According to the Penal Code, the members of the management board are criminally 314 liable when they haven’t fulfilled their obligations concerning submission of bankruptcy petition (failure to call a meeting of shareholders when net assets of the private limited company are less than one-half of the share capital, or less than the Ermo Kosk/Peeter Lepik

161

315

Estonia

III. Private Limited Company

minimum amount of share capital or failure to perform the obligation to submit a bankruptcy petition).

9.

Accounting

a)

Bookkeeping and annual financial statements (publication obligations)

315 The management board organises the accounting of the private limited company. If the company has the supervisory board then it has the right to examine all documents of the private limited company and to audit the accuracy of accounting. 316 Accounting is mainly regulated in the Accounting Act and according to that the private limited company is required: (1) to organise its accounts in accordance with the accounting principles generally accepted in Estonia or international financial reporting standards in such a way as to ensure the provision of up-to-date, relevant, objective and comparable information concerning the financial position, economic performance and cash flows of the accounting entity; (2) to document all its business transactions; (3) on the basis of source documents or summary documents prepared on the basis thereof, to post and record all its business transactions in accounting ledgers and journals; (4) to prepare and submit annual reports and other financial statements pursuant to the procedure provided for in the Accounting Act and other legislation; (5) to preserve accounting documents. 317 After the end of the financial year, the management board prepares the annual accounts and activity report pursuant to the procedure provided for in the Accounting Act. 318 According to the Accounting Act, an annual report consists of the annual accounts and the management report. The auditor’s report and the profit distribution proposal for the financial year must be annexed to the annual report. 319 The management board presents the annual accounts and management report (annual report) and the profit distribution proposal to the shareholders. If the private limited company has an auditor or a supervisory board, the conclusion of the auditor and the opinion of the supervisory board shall be appended to the reports. 320 Approval of the annual report shall be decided by the shareholders. After that the management board submits the approved annual report to the Commercial Register together with the profit distribution proposal. An annual report must be submitted not later than six months after the end of the financial year.

162

Ermo Kosk/Peeter Lepik

9. Accounting

b)

Estonia

321

Audit requirements

A private limited company must have an auditor only if the share capital of the 321 company is greater than EEK 400,000 or if so prescribed by the Articles of Association. Auditing is also required if at the balance sheet date of the accounting year the company exceeds the limits of at least two of the three following criteria: (a) sales revenue (net turnover): EEK 6 million; (b) balance sheet total: EEK 3 million; (c) number of employees: 5. If auditing is needed then the shareholders meeting specifies the number of auditors and 322 appoints them. The written consent of a person is required for appointment of the person as auditor. After the annual accounts and activity report are prepared, the management board must promptly present them to the auditor. Then the auditor audits the annual report and makes the auditor’s report, which will also be presented to the shareholders meeting. Auditing is mainly regulated in the Authorised Public Accountants Act and the Au- 323 diting Rules enacted by the Minister of Finance. The Auditing Rules include requirements for auditing and professional ethics based on the standards of the International Federation of Accountants. The auditing rules shall be prepared by the management board of the Board of Auditors and approved by a regulation of the Minister of Finance. Auditors have the right to perform audits. An auditor is a natural person who has 324 obtained the qualification of an auditor or a company of auditors entered in the list of auditors. Auditing means the examination of financial statements and the provision of an opinion pertaining thereto according to the auditing rules. An auditor must be independent and impartial in the professional activities and shall 325 operate solely pursuant to law, the auditing rules, the requirements of professional ethics, and the resolutions and recommendations of the bodies of the Board of Auditors. An auditor may not operate in an area of activity, which may influence the auditor’s impartiality, nor is incompatible with good auditing practice. An auditor must maintain the confidentiality of information, which has become known 326 to the auditor in the course of the professional activities of the auditor. If auditing is required by law, an auditor or a firm of auditors is liable for any damage 327 wrongfully caused to a client or a third party as a result of violation of an obligation arising from the professional activities of the auditor or the firm of auditors. Any agreement on the restriction of liability of an auditor is void. c)

Disclosure

When the shareholders have approved annual report, the management submits the 328 approved annual report to the Commercial Register together with the profit distribution proposal and the auditor’s report, if auditing is compulsory. After presenting the annual Ermo Kosk/Peeter Lepik

163

329

Estonia

III. Private Limited Company

report to the Commercial Register everyone has the right to examine the business files, and to obtain copies of documents in the business files, which means that the annual report of the company is publicly accessible.

10. Taxation 329 Estonia does not levy corporate income tax on retained earnings. Corporate income tax is levied solely on distributions of corporate profits. Resident companies are subject to income tax (so-called “distribution tax”) on distributed profits, including transactions that are considered as hidden profit distributions (e.g. fringe benefits, gifts and donations, non-business expenses). In addition, companies are subject to social security contributions, land tax, value added tax and various excise taxes. Municipalities are authorized to introduce local taxes, most notably advertisement tax and sales tax. The importance of the local taxes, however, is very small. 330 Important features of the Estonian tax system have been harmonized with EU tax law, including direct taxes, mutual assistance and administrative cooperation. Application of corporate income tax solely to profit distributions, which is allegedly contrary to the EU Parent-Subsidiary Directive, shall be preserved at least until December 31, 2008, which is the end of the transition period granted by the EU to Estonia. 331 Tax residence of a company is determined on the basis of its incorporation: a company is resident in Estonia if it is incorporated under Estonian law. Any form of profit distribution is taxed at the rate of 24/76 of the net amount of distributed profits. 332 The main taxes that are applied for companies in Estonia are following: (a) Corporate income tax. Income tax matters are regulated by the Income Tax Act. In Estonia, corporations are generally exempt from income tax on retained earnings. That is, no corporate income tax duty arises from the fact that a particular legal entity earns profit; income tax is, instead, tied to the distribution of profit. Estonia taxes income at a flat rate of 24/76 of the net distribution. (b) Value Added Tax. Value added tax is imposed on taxable supply, as defined in the Value Added Tax Act. Value added tax is applied as tax on added value, which effectively means that a tax-paying corporation is entitled to offset its VAT duty against the VAT already paid to other persons. VAT is, therefore, ultimately paid by the final stage consumers of the product. All persons involved in business whose annual taxable supply exceeds EEK 250,000 (equals approx. EUR 16,000) must register themselves as VAT taxpayers and declare and pay VAT. For those with more modest supply, registration is optional. The full VAT rate currently stands at 18% of the taxable value. Certain goods and services are currently charged with a 5% VAT (e.g. books, heat energy etc.). Other goods and services are zero-rated, and so is export. (c) Social Tax. Social Tax is regulated by the Social Tax Act. Corporations registered in Estonia must pay a 33% social tax on the following payments: wages and salaries paid 164

Ermo Kosk/Peeter Lepik

11. Dissolution of a company/termination of the business

Estonia

333

to employees; payments to members of management, trustee in bankruptcy and members of the bankruptcy committee, where applicable; payments to natural persons on the basis of all kinds of service contracts; fringe benefits within the meaning of the Income Tax Act, expressed as a monetary value including income tax; other payments for performance of all kinds of work, not listed in the Social Tax Act. (d) Unemployment Contributions. Under Estonian law, the employers share the burden of the unemployment insurance with the employees. Unemployment insurance is provided for in the Unemployment Insurance Act. The burden of such unemployment contribution is divided between the employer and the employee. The employer pays the insurance premium at the rate of 0.25%-1%, where the exact rate is determined by the Government and is announced annually. Currently, employer pays 0.5% of the taxable basis. The taxable basis is generally wages and other payments made to the employees, except the payments made in accordance with the Labour Contract Act upon termination of the labour contract. (e) Land Tax. All owners of land (or, where appropriate, owners of a right of superficies or an usufruct) must pay a land tax of 0.1%-2.5% of its taxable value (except for the agricultural land, in case of which the rate is 0.1%-2.0%). The exact rate of tax may differ according to location, and is set by the local governments annually. (f) Local Taxes. Local government bodies are authorised to impose local taxes in certain fields in accordance with the law. Local taxes are sales tax, boat tax, advertisement tax, road and street closure tax, motor vehicle tax, animal tax, entertainment tax and parking charge. Local authorities may choose to impose any, all or none of the above named taxes in accordance with the procedural requirements and maximum rates set out in the Local Taxes Act. Again, the importance of the local taxes is very small.

11. Dissolution of a company/termination of the business A private limited company may be dissolved by a resolution of shareholders, by a court 333 judgement and on other bases prescribed by law or the Articles of Association. When shareholders decide to terminate the business then a dissolution resolution shall 334 be adopted. At least two-thirds of the votes represented at the shareholders meeting must be in favour to do that unless the Articles of Association prescribe a greater majority requirement. If the resolution is adopted without calling meeting then at least two-thirds of all shareholders must be in favour. A private limited company is dissolved by a court judgement (compulsory dissolution) 335 if: (a) the general meeting does not adopt a dissolution resolution if its adoption is obligatory pursuant to law or the Articles of Association, the shareholders have not adopted any resolutions when the net assets of the private limited company are less than one-half of the share capital, or less than the minimum amount of share capital; Ermo Kosk/Peeter Lepik

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336

Estonia

III. Private Limited Company

(b) the term of authority of the management board expired more than two years previously and a new management board has not been elected; (c) the objective or activities of the company are contrary to law, public order or good morals; (d) the company was founded in material violation of the law or if the Foundation Agreement was adopted under circumstances due to which the agreement is void, and the corresponding violation cannot be subsequently eliminated; (e) the Articles of Association of the company are contrary to law to a significant extent; (f) the company does not comply with the requirements established for the legal person by law; (g) there are also other grounds for compulsory dissolution enacted in laws. 336 A court may set a term for company for elimination of the deficiencies before making the decision if the law allows that. 337 Company is liquidated upon dissolution according to proceedings enacted in the Commercial Code and in the General Part of Civil Code Act. In bankruptcy proceedings, a company is liquidated pursuant to the procedure provided for bankruptcy proceedings. Bankruptcy proceeding is regulated in the Bankruptcy Act. 338 The Commercial Code stipulates requirements for notification of creditors, notice of liquidation, submission and satisfaction of claims, distribution of assets, termination of legal person and other procedures for liquidation.

12. Private limited company and limited partnership (limited partnership with private limited company as general partner) a)

Formation/constitution

339 A limited partnership may be founded by a natural persons or legal persons. There must be at least two persons who operate under a common business name, and at least one of the persons (general partner) must be liable for the obligations of the limited partnership with all of his or her assets, and at least one of the persons (limited partner) must be liable for the obligations of the limited partnership to the extent of his or her contribution. 340 A limited partnership shall operate on the basis of a partnership agreement concluded by the partners. The partners shall agree on: (a) the business name and seat of the limited partnership; (b) the area or areas of activity of the limited partnership; (c) the amount of the contributions of the partners. The partners may also agree on other terms and conditions, which are not in conflict with the law.

166

Ermo Kosk/Peeter Lepik

12. Private limited company and limited partnership

Estonia

341

The partners make contributions in the amount prescribed by the partnership agree- 341 ment. A contribution may be monetary or non-monetary. A non-monetary contribution may also be the provision of services to the limited partnership, or the transfer to or use of assets by the limited partnership. The monetary value of a non-monetary contribution is determined by the partnership agreement. After concluding the partnership agreement, a petition for entry in the Commercial 342 Register shall be submitted. All partners must sign the petition. Passive legal capacity of a limited partnership arises as of entry of the company in the Commercial Register. Each general partner has the right and the obligation to participate in the management 343 of the limited partnership. A limited partner does not have the right to manage or to represent the limited partnership unless the partnership agreement prescribes otherwise. In managing the limited partnership, a managing partner may perform acts, which are necessary for the everyday economic activities. A resolution of the partners is required for the performance of acts, which are beyond 344 everyday economic activities. A limited partner may also participate in the decisionmaking of the partners. b)

Transfer of partnership interest, participation of new partners, withdrawal of partners and dissolution

A new partner may be admitted into a limited partnership only with the consent of all 345 partners. Upon the death of a partner, his or her successors have the right to join the limited partnership only if so prescribed by the partnership agreement or if all the partners agree to it. It should be noted that a person who becomes a general partner of a limited partnership is also liable for the obligations of the limited partnership, which arose before the person became a partner. A partner may depart from the limited partnership at the end of the financial year by 346 giving at least six months’ advance notice thereof. The partnership agreement may also prescribe a shorter term. The Commercial Code stipulates quite strict liability for the general partners who leave. Former partner will still be solidarily liable with the other partners for an obligation of the limited partnership which arose before entry of the departure or exclusion of the partner in the Commercial Register if the due date for performance of the obligation has arrived or arrives within five years after departure or exclusion. Exclusion of partners may be demanded by other partners or by creditors of the limited 347 partnership. Other partners may submit a petition to a court on exclusion of partner if he or she has violated material obligations that may cause dissolution of a company by a court judgement. Creditors of the company may submit a petition to a court on exclusion of the general partner if satisfaction of the claim from the assets of the partner is unsuccessful. In that case, the creditors may demand that the claim will be satisfied from the compensation payment to the partner.

Ermo Kosk/Peeter Lepik

167

348

Estonia

III. Private Limited Company

348 Upon departure or exclusion of a partner from the limited partnership, the partner shall be paid as compensation, which the partner would receive if the company were dissolved. 349 If all the limited partners depart or are excluded from a limited partnership and at least two general partners remain, the limited partnership shall be deemed to be transformed into a general partnership without dissolution. Transformation shall be entered in the Commercial Register on the initiative of the registrar or on a petition of the general partnership. 350 A limited partnership may be dissolved by a resolution of the partners, by a court judgement, upon expiry of a term or achievement of an object. There may be also other grounds for dissolution. The partnership agreement may prescribe that the limited partnership is also dissolved upon departure of a partner from the general partnership, the bankruptcy of a partner or upon the death of a partner who is a natural person, or dissolution of a partner who is a legal person. c)

Taxation/accounting

351 Taxation is same for all companies, there are no differences. 352 Limited partnership has also accounting obligation like other legal persons. The partners approve the annual report of the limited partnership. The amount of the share of profit to be distributed among the partners shall be decided by the partners after the end of the financial year on the basis of the annual balance sheet. 353 Generally auditing is not compulsory. The Accounting Act stipulates that accounting is required if at the balance sheet date of the accounting year the company exceeds the limits of at least two of the three following criteria: (a) sales revenue (net turnover): EEK 6 million; (b) balance sheet total: EEK 3 million; (c) number of employees: 5. 354 If a partner of the limited partnership is a private limited company, a copy of the signed annual report must submitted to the Commercial Register for permanent preservation together with the auditor’s report, if auditing is compulsory, and the profit distribution proposal within six months as of the end of the financial year.

168

Ermo Kosk/Peeter Lepik

France Cecilia Della Berta

Table of Contents I.

Introduction

171

II. Types of Profit-Making

Entities in France III. The Societe Anonyme or SA 1. Character of the SA 2. Formation a) Preparation of the Articles of Incorporation (statuts) aa) Form bb) Name cc) Duration dd) Registered Office ee) Purpose ff) Registered capital gg) Shares hh) Distributions ii) Appointment of Management jj) Initial Shareholders b) Subscription and Payment of the registered capital c) Certificate of Subscription and Payment d) Leasing or Purchasing a Registered Office e) Signature of the Articles f) Appointment of the Officers g) Registration formalities aa) Registration formalities specific to foreign investments (1) Foreign exchange control regulation (2) Foreign trader’s card (‘‘Carte de commerc¸ant e´tranger’’) bb) Registration formalities always required

Cecilia Della Berta

173 173 173 173 174 174 174 174 174 174 174 174 175 175 175 176 176

3. a) b)

4. a) b) c) 5. a) b) c) d) e) f) 6. a)

176 177 177 177 177 177 177 177

b) c) 7. a) b) c)

(1) Publication formalities (2) Registration with the Register of Trade and Companies cc) Other registration requirements The Shareholders Rights and duties of shareholders Shareholders meetings aa) Ordinary General Meetings of Shareholders bb) Extraordinary General Meetings of the Shareholders SA shares Classes of shares Transfer of shares Restriction on an SA to trade its own shares Management of the SA Board of Directors Directorate and Supervisory Board Powers of management Status of management Conflict of interest Liability Accounting Bookkeeping and annual financial statements aa) Accounting obligations bb) Fiscal year cc) Annual accounts dd) Communication of annual accounts Audit requirements Disclosure Taxation Corporate tax Value-added tax (VAT) Registration duties

178 178 178 179 179 179 180 181 182 182 182 182 183 183 184 184 185 185 186 187 187 187 187 187 187 188 188 188 188 190 190

169

France d) 8. a) b)

Miscellaneous taxes Dissolution/liquidation of an SA Dissolution Liquidation

Table of Contents 191 191 191 192

IV. The socit par actions simplifie

or SAS 1. 2. 3. a) b) 4. a) b) 5. a) b) c) 6. a)

Character of the SAS Formation Shareholders Rights and duties of shareholders Shareholders decisions The SAS shares Classes of shares Transfer of SAS shares Management of the SAS Management Conflict of interests Liability of management Accounting Book-keeping and annual financial statements b) Statutory auditors 7. Taxation 8. Dissolution/termination

193 193 193 193 193 193 194 194 194 195 195 196 196 196 196 196 197 197

V. The socit responsabilit limite

or SARL 1. Character of the SARL 2. Formation a) Preparation of the Articles aa) Form bb) Name cc) Duration dd) Registered Office ee) Purpose ff) Registered capital gg) Statement of shareholding and payment of subscription price b) Subscription and Payment of the registered capital

170

197 197 197 197 197 198 198 198 198 198 198 199

c) Leasing or Purchasing a Registered Office d) Signature of the Articles e) Appointment of the Manager f) Formalities of Registration and Publication g) Withdrawal of Paid-In Capital 3. The Shareholders a) Rights and duties of the shareholders of the SARL b) Shareholders meetings aa) Ordinary general meetings of the shareholders bb) Extraordinary general meetings of the shareholders 4. SARL Shares a) General Rules b) Transfer of shares 5. Management of the SARL a) Choice of the Manager b) Status of the Manager c) Functions of the Manager d) Liability of the Manager 6. Accounting a) Book-keeping and annual financial statements b) Audit requirements c) Disclosure 7. Taxation 8. Dissolution and liquidation of the SARL a) Dissolution b) Liquidation

VI. Other types of business entities 1. 2. 3. 4.

General partnership (socit en nom collectif – SNC) Limited partnership (socit en commandite) Socit en participation Economic Interest Grouping (Groupement d’IntrÞt Economique – GIE)

199 200 200 200 200 200 200 201 202 202 203 203 203 204 204 204 205 205 206 206 206 206 206 207 207 207 207 207 208 208

209

Cecilia Della Berta

Index / I. Introduction

France

1

Index Administrateurs (SA), see Directors Board of Directors (SA) 10, 11, 12, 14, 15, 17, 18, 19, 20, 22, 23, 30, 31 Business License Tax (Taxe professionnelle) 26 Capital gain 24 Carte de commerant tranger (foreign trader card) 12, 38 Companies (socits) 7, 8, 12, 17, 18, 21, 22, 23, 24, 25, 26, 28, 30, 33, 39, 42 Conseil d'Administration, see Board of Directors Conseil de Surveillance, see Supervisory Board De facto Company 7 Directoire (Directorate) 11, 12, 14, 17, 18, 19, 20, 21 22, 23, 30, 31 Directors (SA) 12, 13, 18, 19, 20, 21, 31 Economic Interest Grouping, see GIE EURL (Entreprise Unipersonnelle Responsabilit Limite) 7, 32 Grant (Manager) 33, 41, 42, 43 Impt sur les socits (corporate tax) 23, 24, 42 Income tax 20, 41 Limited partnership, see socit en commandite Local taxes 26 Manager, see Grant Partnership (socit en participation) 7, 8, 42, 43

I.

Prsident du conseil d'administration (see Board of Directors) Registration formalities of companies 12 Registration duties (droits d'enregistrement) 25 SA 8, 9, 10, 11, 12, 13, 14, 16, 17, 18, 19, 20, 21, 22, 23, 25, 26, 27, 29, 30, 31, 32, 34, 40, 41, 42 SARL 7, 8, 23, 25, 31, 32, 33, 34, 35, 36, 37, 38, 40, 41, 42 SAS 8, 12, 23, 25, 27, 28, 29, 30, 31 SCA (Socit en Commandite) 23, 42 SCS (Socit en Commandite Simple) 42 Shares (transfer of shares in SA, SARL) 9, 16, 17, 37 Silent partnership, see Socit en participation SNC 41, 42 Socits, see Companies Socit par actions simplife, see SAS Socit anonyme, see SA Socit en commandite (limited partnership) 42 Socit en nom collectif, see SNC Socit en participation (silent partnership) 42 Socit Responsabilit Limite, see SARL Supervisory Board 10, 12, 14, 15, 17, 18, 19, 20, 21, 27, 42 TVA, see VAT Value Added Tax, see VAT VAT (TVA) 24, 25

Introduction

In France the term “company” (socie´te´) includes all profit-making entities, including 1 partnerships (socie´te´s de personnes)1 and stock companies, except for the EconomicInterest Groupings (Groupements d’Inte´reˆt Economique – GIE) which is supposed to be a non-profit entity (see part IV. 4.). All companies and GIE have a legal personality, except for a special type of partnership known as the socie´te´ en participation.

1

The English term “partnership” seems to be the closest translation for the expression ‘‘socie´te´s de personnes’’.

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2

France

I. Introduction

2 Pursuant to Article 1832 of the French Civil Code, three criteria characterise the existence of a company, whether a partnership or a stock company: – the intention of parties involved to collaborate in the pursuit of the common activity (affectio societatis); – a contribution made by each party; – each party’s sharing in the profits, savings, and losses. 3 In some exceptional cases, the Courts consider that informal cooperation agreements, on the basis of these criteria, constitute a ‘‘de facto company” (socie´te´ de fait) or an “apparent company” (socie´te´ cre´e´e de fait) resulting in joint and several liability of the members. 4 The criteria of Article 1832 result in the following: – a company (partnership or stock company) must have more than one member. However, there are two types of stock company that have a single member: the EURL, a type of socie´te´ a` responsabilite´ limite´e (SARL) and the SASU, a type of socie´te´ par actions simplifie´e. – the intention of the parties to form a company together means that the company is independent from its members. This principle was confirmed by the Court of Appeal of Paris in the well-known Fruehauf2 decision, in which the Court ruled that the shareholders are only one component of a company, and that companies have their own specific identity; – in all cases, under French company law, the “abuse of majority position” by the majority shareholders (i. e. a decision contrary to the interests of the company and made solely in the interests of the majority shareholders), or an “abuse of company assets” (i. e. the use of the assets or of the credit of the company in a manner that is contrary to the interest of the company for personal ends and in bad faith) are prohibited. The abuse of company assets is a criminal offence, while the abuse of a majority position leads only to nullification of the decision or /and to the payment of damages, depending on the case. It should be noted that these rules also apply to partnerships. 5 In case of bankruptcy, individuals and legal entities who have de jure or de facto managed a French legal entity (except legal entities subject to administrative law) can be held personally (or jointly and severally) liable for the unpaid debts of such entity, when it is proven that a mismanagement act carried out by such persons contributed to its debts.

2

172

Decision handed down by the Court of Appeal of Paris on May 22, 1965 (Dalloz 1968 page 147). The Court held that the U. S. parent company of Fruehauf France was guilty of abuse of its majority position in forcing Fruehauf France (under pressure from the U. S. Government) to terminate an agreement for delivery of trailers to the People’s Republic of China.

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1. Character of the SA

France

6

II. Types of Profit-Making Entities in France Aside from de facto and “apparent companies”, there are three principal types of profit- 6 making business entities in France, all of which have legal personality (except for the socie´te´ en participation): partnerships, companies with limited liability, and the economic-interest grouping (GIE). The various French types of profit-making organisations are further broken down into 7 civil companies (socie´te´s civiles), which are primarily real-estate companies and companies created by independent workers (such as lawyers), and commercial companies (socie´te´s commerciales), which can engage in all commercial activities (and include most industries and business activities) as well as in civil activities. There are three main types of companies with limited liability in France. The best 8 known is the socie´te´ anonyme (SA). The socie´te´ par actions simplifie´e (SAS.), which is very similar to the SA but operates under simplified rules. The third type of company with limited liability is the socie´te´ a` responsabilite´ limite´e (SARL), which is more suitable for small companies. The choice of an SA or an SARL generally depends on how big the business in France is expected to be. From a business point of view, an SA may appear more reliable for third parties than an SARL, which is usually used for small businesses. Remark: Please note that any mention made to articles, where not specifically specified, shall mean articles of the French code of commerce (‘‘Code de commerce’’).

III. The Societe Anonyme or SA 1.

Character of the SA

The SA is a vehicle offering the advantage of limited liability; the shareholders of an SA 9 are subject to liability for the debts of the company only to the extent of their capital contributions thereto. Remark: there are two types of SAs: SAs not making public offerings of securities and SAs that do make public offerings of securities. The SA making public offerings of securities will not be studied hereafter.

2.

Formation

The SA is technically formed at the time of signature of the Articles by all of the initial 10 shareholders. It should be noted, however, that the SA does not acquire full legal existence and, as a consequence, cannot enter into contracts in its own name, until such time as it is registered with the Trade and Companies Register of its place of incorporation (art. L. 210-6). Cecilia Della Berta

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11

France

III. The Societe Anonyme or SA

In order to set up an SA, various actions must be carried out. a)

Preparation of the Articles of Incorporation (statuts) (hereinafter referred to as “Articles”)

11 The Articles may contain such provisions as the shareholders desire, but must, in all cases, contain the following (art. L. 210-2): aa)

Form

12 Shareholders elect to associate themselves by forming an SA. bb) Name

13 Designation of the name of the SA, which name must always be accompanied by, but need not include, the words socie´te´ anonyme or the initials “SA” and a statement of the company’s registered capital (art. L. 224-1). In order to avoid possible infringement of, or confusion with, third parties’ trademarks or corporate names, it is advisable to verify, at the outset, the availability of the proposed name of the SA.3 cc)

Duration

14 Recital of the duration of the SA, which duration cannot exceed 99 years, but can be extended for periods not to exceed 99 years. dd) Registered Office

15 Recital of the address of the registered office of the SA. ee)

Purpose

16 Statement specifying the purpose of the SA; mere reference to “any commercial, financial or industrial activity” is not sufficient and a more specific recital of the nature of the proposed corporate activity is required. ff)

Registered capital

17 Declaration of the registered capital of the SA which, subject to certain exceptions, may not be less than 37,000 euros for SAs not making public offerings of securities (art. L. 224-2). Reference must also be made in an annex to the Articles to the identity of the initial shareholders and to the number of shares for which each has subscribed. In the event that capital contributions in kind are made or specific advantages granted, appraisal from an independent expert of such contributions in kind or specific advantages must be annexed to the Articles (art. L. 225-14). gg) Shares

18 Declaration of the number of shares is fixed by the Articles. Where the shares of an SA are divided into different classes benefiting from various privileges including, inter alia, preferential dividend or voting rights, specific mention thereof must be made in the Articles of the number of shares in each class as well as the portion of the registered capital represented by each class or the par value of the shares of each class. 3

174

Such verification may be conducted at the Institut National de la Proprie´te´ Industrielle (I. N. P. I.). Such verification usually takes two to four weeks to complete.

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2. Formation

France

19

Where the transfer of shares is restricted, the Articles must indicate the specific con- 19 ditions required for such transfer. hh) Distributions

Provisions relating to the distribution of profits, to the establishment of reserve accounts 20 and to any priorities or preferences, in case of liquidation must also be made. ii)

Appointment of Management

Appointment of the first members of the Board of Directors (Conseil d’Administration) or 21 the first members of the Supervisory Board (Conseil de Surveillance)4 as well as the first Statutory Auditor(s) (commissaire(s) aux comptes) (art. L. 225-16) must be set forth in the Articles. The Articles must also set forth the terms as regards the organization, functioning and 22 powers of the management bodies. jj)

Initial Shareholders

A recital of the names of all shareholders who signed the Articles, or had them signed 23 by an attorney-in-fact must be annexed to the first Articles of the Company. In addition to the foregoing provisions which must be included in the Articles, a recital 24 of all contracts entered into and of the commitments and obligations assumed by the initial shareholders in the name of the corporation before the signature of the Articles must be annexed to the Articles. The initial shareholders who acted in the name of the SA are personally jointly and severably liable for all such obligations until such time as the SA is fully incorporated; such obligations are then considered as ratified and as having been entered into ab initio by the SA. If, however, the aforesaid recital of obligations omits one or more obligations incurred 25 by the initial shareholders, such obligations may be subsequently ratified by the shareholders (art. L. 210-6). The start-up of the company may require that certain acts be taken on behalf of the SA- 26 in-formation after the signature of the Articles but before the registration of the company at the Trade and Companies Register. Those shareholders who act on behalf of the company after the signature of the Articles but before the aforesaid registration are jointly and severally liable for all such actions unless: (i) such acts have been authorized in an annex to the Articles or within a separate decision of the shareholders, in which case, once the SA is duly registered, they are deemed to have been entered into ab initio by the SA, or (ii) the shareholders, after the registration of the SA, specifically ratify the said actions.

4

Please refer to part 5 hereafter.

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27

France

b)

Subscription and Payment of the registered capital

III. The Societe Anonyme or SA

27 The registered capital of the SA must be subscribed for in its entirety (art. L. 225-3). It is to be noted that under French law the concept of authorized but unissued shares of share capital does not exist; all shares must be issued and they are usually issued at par. Only a portion of the capital, but never less than one half of the par value of the shares to be issued, must be paid in; the remaining subscription price for the shares must be paid in no later than five years from the date of the registration of the SA, or earlier, if the Board of Directors or the Directorate so decides (art. L. 225-3). However, the shares issued for contributions in kind must be fully paid in (art. L. 225-3). 28 It is also possible in France to incorporate an SA by making a public offering of its shares in order to raise the initial registered capital thereof (arts. L. 225-2 through L. 225-11). 29 Payment in cash for shares subscribed for must be made either to the Caisse des de´poˆts et consignations, to a notaire,5 to a bank account opened in the name of the company-information. 30 Such funds may not be withdrawn by the company until the incorporation process is completed (arts. L. 225-12 and L. 225-11). In the event that payment is made in kind or specific advantages granted, an evaluation thereof must be made and incorporated into the Articles (art. L. 225-14). While such evaluation must be the subject of a report by an expert appraiser (commissaire aux apports) appointed by the President of the Tribunal of Commerce at the request of one or more shareholders, such report is not binding and the shareholders may assign a different value to such contributions in kind. If, however, a third party is harmed as a result of an overvaluation of such contributions, the shareholders may be personally subject to civil and criminal penalties (arts. L. 225-8 and L. 242-2). c)

Certificate of Subscription and Payment

31 The subscription and payment for shares must be acknowledged by the depositary of the funds paid in by the shareholders in a certificate of subscription and payment; such certificate is issued upon presentation of a list of shareholders which indicates the amounts actually paid in by each shareholder (arts. L. 225-6 and L. 225-13). d)

Leasing or Purchasing a Registered Office

32 Inasmuch as mention must be made in the Articles of the location of the registered office of the SA, it is necessary to either execute a lease agreement relating to or to purchase commercial property where the company will maintain such office (C. com., art. L. 123-10).

5

176

Public officer who receives and draft contracts, wills and other type of deeds.

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2. Formation

e)

France

33

Signature of the Articles

The Articles must be in writing and may be signed either sous seing prive´ 6 or before a 33 notaire. The signature of the Articles before a notaire is mandatory when contributions in kind in the form of rights to real property are made. By signing the Articles, the initial shareholders become legally obligated to pay the total amount of the subscription price for their shares if the latter has not already been fully paid in (arts. L. 225-3 and L. 225-131). f)

Appointment of the Officers

Once the Articles are signed, the Directors named in the Articles must meet and 34 appoint the Chairman of the Board (Pre´sident du Conseil d’Administration) and, if it so chooses a General Manager (Directeur Ge´ne´ral) and one or several Assistant General Managers (Directeurs Ge´ne´raux De´le´gue´s) (arts. L. 225-51-1 and L. 225-53). In the event that the Articles provide for a Supervisory Board in lieu of a Board of Directors, this body appoints the members of the Directorate (Directoire) and of the Chairman of the Directorate and if it so chooses of one or more General Manager(s) (art. L. 225-59). g)

Registration formalities

aa)

Registration formalities specific to foreign investments

(1)

Foreign exchange control regulation

Foreign companies creating a new company in France may have to declare the setting 35 up of the said company to the French Treasury Department (Direction du Tre´sor) at the time of creation under certain circumstances (cf Decree of March 7, 2003 regulating financial relations with foreign countries «De´cret n8 2003-196 du 7 mars 2003 re´glementant les relations financie`res avec l’e´tranger»). (2)

Foreign trader’s card («Carte de commerant tranger»)

Foreign executives of French companies, such as the Chairman of the Board of Direc- 36 tors (Pre´sident du Conseil d’Administration) or of the Directorate, the General Manager (Directeur General) of a SA, or the Chairman of a SAS must obtain a «Carte de commerc¸ant e´tranger» (foreign trader’s card) before taking up their functions, unless they hold a «carte de re´sident» (French resident permit). However, nationals of the EEA (European Economic Area), including the EU countries, 37 or the OECD countries, as well as Algeria, Andorra, Monaco, are not required to obtain such special authorization. bb) Registration formalities always required

Any company created in France must carry out the following formalities. 6

38

A document signed sous seing prive´ is a legally binding instrument signed by the parties thereto. It is the equivalent of any signed document in common law jurisdictions; the importance of this concept in civil law jurisdictions is the absence of the intervention of a notaire.

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39

France

(1)

Publication formalities

III. The Societe Anonyme or SA

39

– a publication in a newspaper specifically designated as competent to publish legal announcements (hereinafter referred to as a “legal newspaper”),

40

– a publication in the Bulletin Officiel des Annonces Civiles et Commerciales (hereinafter referred to as “BODACC”).7 (2)

Registration with the Register of Trade and Companies

41 Any company set up in France must be registered with the Register of Trade and Companies. The application for registration in the Register of Trade and Companies must be made through the Centre des Formalite´s des Entreprises – CFE (Business Formalities Centre). 42 The documents required for registration are by and large the same in all cases, and include: – Articles of the company (and the documents appointing the legal representatives, if they are not appointed therein); – the lease agreement relative to the premises of the registered office or any documentary evidence establishing the ownership of the premises; – photocopies of passports, (and foreign trader cards if necessary) of the future Directors, Managers and legal representatives; – a formal declaration by the future legal representatives that they have not been found guilty of any criminal offence; – certificate of subscription and payment of the shares. 43 Only after the registration of the SA with the Trade and Companies Register may the paid-in capital of the company be withdrawn by corporate management for corporate purposes (art. L. 225-11). 44 Immediately after the registration of the company with the Trade and Companies Register, the SA must set up accounting books (livres de commerce). The SA must also set up certain corporate books (registres sociaux). cc)

Other registration requirements

45 Registration with the Tax Administration and the social welfare benefits system (URSSAF) will occur automatically upon registration with the Register of Trade and Companies. 46 The filings and other preliminary steps necessary to accomplish these formalities must usually be completed within one month of the underlying legal act; the actual completion of all such formalities by the appropriate administrative personnel normally takes approximately two weeks. 47 A declaration of corporate existence (de´claration d’existence) must be made to the tax authorities within one month after the registration of the company and, as regards value 7

178

The publication in the BODACC is performed by the clerk of the Tribunal of Commerce.

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3. The Shareholders

France

48

added tax liability, the company must make a declaration to the tax authorities of its place of incorporation within fifteen days after commencing business.

3.

The Shareholders

a)

Rights and duties of shareholders

Seven shareholders are required to establish an SA. It is permissible for six shareholders 48 to hold one share each while one shareholder will hold the remainder of the shares. Legal entities can be shareholders. The shareholders hold the most important powers. The shareholders declare dividends, 49 they approve the financial statements and they may decide to dissolve the company. The rights of the shareholders mostly consist of: (i) receiving dividends (this right does not call for specific comments); (ii) transferring their shares under certain conditions (this matter will be studied hereafter in part I.4 b)); (iii) accessing corporate information.

50

As regards the right to access information, all shareholders of an SA have the right to 51 consult, at the registered office of the company, documents relating to the past three fiscal years of the company’s life. These documents are especially the financial statements, the inventory lists, the reports submitted to shareholders or the minutes of shareholders meetings. Furthermore, in connection with the calling of each annual ordinary general meeting of 52 the shareholders, the Board of Directors or the Directorate and the Supervisory Board must supply to each shareholder with the documents relating to the fiscal year to which such meeting relates. These documents are especially the inventory list, the financial statements, the report of the Board of Directors or the Directorate and the Supervisory Board on the operations of the company during the past fiscal year, the text of resolutions proposed for adoption by the shareholders, and if appropriate, the report of the Statutory Auditor, the consolidated accounts and group annual report. With the exception of the inventory list, all documents must be sent to the shareholders at their request no later than fifteen days before the Annual General Ordinary meeting of the shareholders. Upon receipt of such documents, each shareholder has the right to submit written questions to the Board of Directors or the Directorate and the Supervisory Board who, in turn, must respond to these questions during the meeting. b)

Shareholders meetings

All meetings of the shareholders are held pursuant to notice thereof sent by the Board 53 of Directors, the Directorate or the Supervisory Board or, failing to do so, by the Statutory Auditor, by a court-appointed attorney-in-fact or the liquidators of the company (art L. 225-103). Notice of the meeting must be mailed to all holders of nominaCecilia Della Berta

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54

France

III. The Societe Anonyme or SA

tive shares and to the statutory auditors no later than fifteen days prior to the proposed date of the meeting. 54 The notice of the meeting must contain the agenda of the meeting. Except for the removal of management personnel, any decision taken at the meeting which is not set forth in such notice is null and void (art. L. 225-105 and art. 225-121). The agenda of the meeting is normally fixed by the Board of Directors or the Directorate; under certain circumstances, however, shareholders representing at least five percent of the share capital of the company or the Works Council8 (Comite´ d’Entreprise) may request that a resolution that they propose for adoption at such meeting be included in the agenda (art. L. 225-105). 55 The company must make available, and each shareholder or his representative must sign, the attendance sheet (feuille de presence) at the beginning of the meeting. If a quorum is present, the meeting may proceed. 56 As a general rule, each share is entitled to one vote (art. L. 225-122). Certain shares may not have the right to vote, while others may be granted double voting rights (further to a shareholder agreement or to the company’s Articles). 57 A meeting of the shareholders may not end until the agenda has been fully submitted to the shareholders. After each meeting, minutes thereof must be prepared and signed by the officers of the meeting under penalty of criminal sanctions (art. L. 242-15). aa)

Ordinary General Meetings of Shareholders

58 Decisions not specifically reserved to the competence of Extraordinary General Meetings of the Shareholders may be taken at an Ordinary General Meeting of the Shareholders (art. L. 225-98). An Ordinary General Meeting must be held at least once a year for the approval of the annual report on corporate operations and the financial statements and, if appropriate, the consolidated accounts of the company and must take place within six months after the closing of the fiscal year to which the financial statements relate (art. L. 225-100). 59 During those meetings, the Statutory Auditors must certify the accuracy and fairness of such statements (art. 225-238). 60 Within one month after the Annual Ordinary General Meeting of the shareholders, the yearly financial documents (financial statements, management report etc.) of the company adopted must be filed with the clerk of the Tribunal of Commerce (art. L. 232-23). 61 Ordinary General Meetings are held to consider such matters as: – the removal, replacement and appointment of members of management and the Statutory Auditor;

8

180

Committee of representation of workers – such committee is mandatory for any company employing 50 employees or more.

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62

– the ratification of appointments by the Board of Directors or the Supervisory Board of a successor to one of the members of the management who resigns or dies during the course of a fiscal year; – the ratification of modification of the registered office; – the approval of agreements entered into by the company and management. At Ordinary General Meetings of the Shareholders, a quorum is present if one-fourth of 62 the voting shares are present or represented (art. L. 225-98). If no quorum is obtained, the meeting must be adjourned and a new meeting called pursuant to a notice sent no less than six days before the second meeting is to take place; there is no quorum requirement for the second meeting. Decisions at Ordinary General Meetings of the Shareholders are adopted by a simple 63 majority of the voting shares present, or represented (art. L. 225-98). bb) Extraordinary General Meetings of the Shareholders

The articles of an SA may only be modified by the two-thirds majority vote of the 64 shareholders present or represented at an extraordinary general meeting; the Articles may not amend this rule in any way (art. L. 225-96). Similarly, it is within the sole competence of the shareholders, voting at an extraordinary general meeting, to, inter alia: – to transfer the registered office of the company to a non-neighboring «De´partment»; – to increase or reduce the registered capital of the company; – to eliminate the pre-emptive rights of some or all of the shares in the event of an increase in capital; – to transform the SA into another type of company; – to authorize major corporate reorganization such as mergers or acquisitions; – to dissolve the company. At Extraordinary General Meetings of the Shareholders, a quorum is present if one- 65 third of the voting shares are present or represented. If no quorum is obtained, the meeting must be adjourned and a new meeting called pursuant to a notice sent no less than six days before the second meeting is to take place; a quorum is present at the second meeting if one-quarter of the voting shares are present or represented. At a Extraordinary General Meeting, decisions are adopted by a two-thirds majority of 66 the voting shares present or represented (art. L. 225-96).

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France

4.

SA shares

III. The Societe Anonyme or SA

67 Shares of an SA are called ‘‘actions’’. a)

Classes of shares

68 Different classes of shares can be issued, granting different rights (especially concerning dividends and voting rights) to their respective holders. 69 The most commonly used classes of shares are: – priority shares and ordinary shares, priority shares having a priority right over the profits made by the company for instance; – shares with voting rights and shares with priority rights of dividends without voting rights; – shares with single voting right and shares with double voting right. b)

Transfer of shares

70 Shares of an SA are in principle freely negotiable. While the Articles may provide for approval of any transfer of shares (generally by the Board of Directors or by the Supervisory Board), such provisions cannot apply to transfers in the event of succession, liquidation of joint property of spouses or assignment, either to a spouse or to an ancestor or descendant. The Articles may also provide for right of first refusal (preemption) by all shareholders (or only shareholders of the same class of shares) in case of a transfer of shares. 9 71 Transfers of shares of an SA are executed by means of transfer-of-shares forms (ordres de mouvement) signed by the transferor, and by recording the transfers in the share register and in the shareholders’ accounts. A registration duty of 1% of the sale price, with a maximum amount of EUR 3,049 per operation is applicable to all transfers of shares of non-listed companies. 72 Share certificates can no longer be issued, except in seldom cases, and the only proof of ownership of shares is the record in the share register and in the shareholders’ accounts maintained by the SA and affidavits (attestations) issued by the SA upon request. c)

Restriction on an SA to trade its own shares

73 An SA may purchase its own shares to reduce its capital only pursuant to specific authorizations to do so given at an Extraordinary Meeting of Shareholders (arts. L. 225207 and L. 225-209). The company can also purchase its own shares in connection with profit sharing or stock options plans. The latter can be done only where (i) it has been authorized at an Extraordinary Meeting of Shareholders (art. L. 225-179), (ii) 9

182

A shareholders’ agreement may provide for right of first refusal without limitation; the breach of such clauses is then subject only to payment of damages, while a transfer of shares infringing upon the first refusal provisions of the Articles is null and void.

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74

the company would, as a result of such purchase, hold no more than 10 percent of its share capital (art. L. 225-210) and the company has reserves, exclusive of statutorily required reserves, at least equal to the value of all its holding of its own shares (art. L. 225-210). Failure to respect the provisions herebefore mentioned subjects the management of the 74 company to fines (art. L. 242-24).

5.

Management of the SA

The management of an SA is entrusted either to a Board of Directors (Conseil d’Admin- 75 istration) and to the Chairman of the Board sometimes to a General Manager (arts. L. 225-17 to L. 225-56) or to a Supervisory Board and Directorate (arts. L. 225-57 to L. 225-93). The former method of management is most often selected. a)

Board of Directors

The Board of Director’s role is to set up the corporate strategy, to supervise its imple- 76 mentation and to go through any necessary checks. All the directors, including the Chairman of the Board of Directors, must be share- 77 holders and at least hold one share (unless the Articles provide for a holding of more than one share). The Chairman of the Board of Directors must be an individual, but the other directors may be legal entities (which will then have to appoint an individual as their permanent representative on the Board of Directors). An SA with a Board of Directors functions as follows: – the Board of Directors must have a minimum of three and a maximum of twentyfour members who are appointed by the general meeting of shareholders in most frequent cases. The term of office of a director is a maximum of six years (and three years for the initial directors); Only one third of the directors can be employees of the company. – the Code of Commerce provides for an optional dissociation of the functions of management of a ‘‘Socie´te´ Anonyme’’ with a Board of Directors. Thus, according to the Code of Commerce, companies may choose between two possibilities: (i) either (first possibility) the duties of Chairman of the Board of Directors and General Manager represent two distinct offices: (ii) or (second possibility) the Chairman of the Board of Directors, in addition to the duties assigned to him in case of dissociation (see (i) above), keeps his power of general management and representation of the company.

78

Whatever the chosen option is, one or more Deputy General Managers (whether 79 Directors or not) may be appointed to assist the Chairman ensuring the functions of general management (first possibility) or the General Manager (second possibility) in performing his duties.

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80

France

b)

Directorate and Supervisory Board

III. The Societe Anonyme or SA

80 The corporate system of a Directorate (Directoire) and a Supervisory Board (Conseil de Surveillance) was modelled on the German system of Vorstand and Aufsichtsrat. This system functions as follows: – The Directorate is composed of a minimum of two10 and a maximum of five individuals, who (including the Chairman of the Directorate) can at the same time and under certain conditions have an employment contract with the SA. The Directorate is appointed by the Supervisory Board, and functions as the management body the SA. The term of office of Directorate members is a maximum of six years (if so provided in the Articles and of four years otherwise) and a minimum of two years; – The Supervisory Board comprises a minimum of three members, who can be individuals or legal entities with an individual as permanent representative. This Board is appointed by the general meeting of shareholders, and supervises the work of the Directorate. The Supervisory Board members term of office is a maximum of six years (and three years for the initial members of the Supervisory Board). 81 The Directorate and Supervisory Board system, as compared to the Board of Directors system, may be convenient for a foreign company interested in having a subsidiary in France the management being handle by French individuals, while the foreign investor retain some control. c)

Powers of management

82 When the duties of Chairman of the Board and of General Manager are dissociated, the Chairman of the Board does not ensure the general management of the company and is not legal representative vis-a`-vis third parties. He represents the Board of Directors, ensures the efficient running of the legal organs, makes sure that the Directors can carry out their duties and chairs and prepares the Board of Directors’ meetings and reports upon these meetings to the General Meeting of shareholders. 83 The Chairman ensuring the functions of general management or the General Manager, when the duties of Chairman of the Board and of General Manager are dissociated, is granted the power to represent the company vis-a`-vis third parties and he is responsible for the company’s management. 84 The company is bound even by those acts of the general manager not covered by the purpose of the company unless it is able to prove that the third party was aware that the act exceeded these objects or that could not have known it in view of the circumstances, the simple publication of the Articles being excluded from constituting this proof. Provisions in the Articles and decisions of the Board of Directors limiting the powers of the managers shall not be demurrable with respect to third parties.

10

184

One Directorate member is sufficient in an SA with maximum stock capital of EUR 150,000.

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In agreement with the general manager, the board of directors shall determine the scope 85 and the term of the powers conferred upon the assistant general managers. The assistant general managers shall have the same powers as the general manager with 86 respect to third parties. d)

Status of management

The dismissal of a General Manager (if he is not also the Chairman of the Board), or of 87 possible Deputy General Managers, may be decided at any time by the Board of Directors but, if such dismissal is decided without being justified by valid motive, the company can be required to pay damages to the dismissed Manager. The Directors and the Supervisory Board members may be dismissed at any time by the 88 ordinary general meeting of shareholders. Members of the Directorate (and the Chairman of the Directorate) who, as indicated 89 above, are appointed by the Supervisory Board, may be dismissed ad nutum by the ordinary general meeting of shareholders without any justification or by the Supervisory Board if the Articles provide so. If the decision to dismiss them is unreasonable, they may be entitled to sue for damages. 90 For income tax purposes, the compensation of the Chairman of the Board, the General 91 Managers, and the members of the Directorate is considered as salary. As a result, these persons may be entitled to certain tax deductions. They are covered by the same social security provisions as employees, and in most cases they also participate in specific pension funds to which the SA voluntarily subscribes at. However, they cannot collect benefits from the general unemployment insurance plan of the social security system. e)

Conflict of interest

As a general rule, agreements may be entered into by a company, directly or indirectly, 92 with one of the members of its management where such agreements relate to the “normal operation” of the company and are concluded upon “normal terms”. Where, however, an agreement is entered into by the company and its Directors or 93 General Managers or Deputy General Managers which is not within the normal scope of the company’s activities or which is not at arm’s length, such agreement must be submitted to either the Board of Directors or the Supervisory Board for its prior approval (art. L. 225-39). The Director or General Manager or Deputy General Manager concerned cannot participate in the vote. Only if consent is given can such agreement be concluded. If the foregoing procedure is not followed, the agreement may be annulled upon the petition of the company or its shareholders if it is prejudicial to the company (arts. L. 225-42 and L. 225-90). Once the agreement has been authorised by the Board of Directors or the Supervisory Board, the statutory auditor(s) must be informed and the agreement must be approved at the general ordinary meeting of shareholders on the Cecilia Della Berta

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France

III. The Societe Anonyme or SA

basis of a special report prepared by the regular auditor(s). Where not approved at the general meeting of shareholders, the agreement will nevertheless continue to be applicable with respect to third parties, but the Director or the General Manager concerned will be liable for any damages that the SA may suffer subsequent to the said agreement. These provisions also apply when a Director or a General Manager is indirectly concerned with the agreement. For instance, where a Director or General Manager of the SA is an owner, a general partner, or a Manager or director of another company, agreements made between the SA and this company are subject to the approval procedure even if the company is a foreign company or the agreement is signed in a foreign country. 94 The same rules also apply to agreements made between the SA and a member of its Directorate or its Supervisory Board. f)

Liability

95 A Director or member of the Directorate is subject to civil liability for violation of the provisions of either the law or the Articles or for acts of mismanagement (arts. L. 225249, L. 225-251 and L. 225-256). 96 Suit against a member of management may be brought by an individual, either a shareholder or a third party, suffering actual damage (art. L. 225-120). Except where the liability arises out of specific acts taken by an individual, all Directors or members of the Directorate are jointly and severably liable to the company or third parties suffering damages; as among the Directors or members of the Directorate, the Court has the power to allocate damages (arts. L. 225-251 and L. 225-256). 97 The civil liability of a member of the Supervisory Board is more restricted. Inasmuch as the role of the Supervisory Board is to supervise, and not to carry out, the actual management of the SA, civil liability will be imposed on a member of the Supervisory Board only upon his failure to properly carry out his duties, i. e. to properly supervise management or to disclose to the shareholders his personal knowledge of law infringements or acts of serious mismanagement of a member of the Directorate (art. L. 225257). 98 It is important for a foreign investor to be aware that French company law contains many provisions imposing criminal sanctions on Directors, members of the Directorate or members of the Supervisory Board. 99 Inasmuch as the Chairman is, by definition, a Director, he is liable to the company and to third parties for acts of mismanagement in the same manner as any member of the board. 100 The General Manager of an SA is subject to the same civil and criminal liability as a Director or member of the Directorate (art. L. 225-251). The Assistant General Manager is subject to criminal sanctions under the same conditions as the General Manager (art. L. 248-1). 186

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6. Accounting

France

101

The Directors, the members of the Directorate and the General Manager and any 101 person who, although not formally named to a management position, actively manages or has actively managed the affairs of an SA may be subject to civil and criminal sanctions in the event of the insolvency of the company and the commencement of bankruptcy proceedings where they have committed a proven error in the operation of the company and where such error contributed to the insolvency of the company.

6.

Accounting

a)

Bookkeeping and annual financial statements

aa)

Accounting obligations

All commercial companies shall enter into their accounts the movements affecting the 102 assets of their undertaking. These movements shall be recorded chronologically. The people in charge of accounting in the company must check, by means of a stock- 103 take at least once every twelve months, the existence and value of the assets and liabilities of the undertaking. They must prepare annual accounts at the end of the financial year in view of the 104 entries made in the accounts and the stocktake. bb) Fiscal year

The results of the company’s activities are reviewed periodically at the end of each fiscal 105 year (exercice social). cc)

Annual accounts

As already discussed, at the end of each fiscal year, the Board of Directors or the 106 Directorate must establish the company’s annual accounts. These annual accounts shall consist of the balance sheet, profit and loss account and an 107 annex which shall form an inseparable whole (arts. L. 123-12, al. 3). The non-presentation of faithful and true corporate accounts expose the directors of 108 important criminal penalties (arts. L. 241-3, 38; L. 243-1; L. 244-1). dd) Communication of annual accounts

Annual accounts must be made available to the statutory auditors a month before their 109 calling to the shareholders annual meeting (art. L. 232-1). The annual accounts must also be presented to the shareholders.

110

In all commercial companies, Managers have to communicate to the Works Council, 111 before their presentation to the annual general meeting, all the documents which will be submitted to the meeting (French labour Code (Code du travail) art. L. 432-4, al. 5). Cecilia Della Berta

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France

b)

Audit requirements

III. The Societe Anonyme or SA

112 Each SA must have at least one statutory auditor (commissaire aux comptes) (art. L. 225218) who is totally independent from the company and whose principal function is to ensure that the company complies with certain provisions of corporate law and to certify the fairness and accuracy of the financial statements of the company as well as the accuracy of all financial data submitted to the shareholders (art. L. 225-235). Each SA must also appoint an alternate statutory auditor (commissaire aux comptes supple´ant) who will replace the statutory auditor in the event the latter is unable to carry out his functions. 113 The statutory auditor has the right to inspect, at all times, all of the contracts, the books, financial documents or minutes of the meetings of management or the shareholders (art. L. 225-236). In addition, the statutory auditors may, in connection with the review of corporate documents, examine the files of the company’s parent company or affiliates and may also gather information about the company from third parties who have acted or are acting as agents of the company (art. L. 225-236). The statutory auditor also has the right to be notified of and to attend all meetings of the shareholders as well as those meetings of the Board of Directors or of the Directorate whereat the financial statements of the company are reviewed and adopted for submission to the shareholders (art. L. 225-238). 114 All the documents which must be furnished to the shareholders in connection with shareholders meetings must be made available to the statutory auditors at the registered office of the SA no less than one month before the annual ordinary meeting of the shareholders is called. c)

Disclosure

115 Annual accounts, once approved by the Annual General Meeting of shareholders, must be registered with the Trade and Companies Register and become therefore public.

7.

Taxation

a)

Corporate tax

116 Companies in France are subject to corporate tax (impoˆt sur les socie´te´s) at the rate of 33.33%, plus a 3% extra surcharge and, for companies whose corporate tax is over EUR 763,000 a further 3.3% social tax; the extra surcharge and the social tax are levied on the corporate tax due. 117 The annual minimum corporate tax (IFA), is based on company’s sales turnover, with a range from EUR 750 to EUR 30,000 in 2003. This IFA functions like a minimum annual company tax payment since it can be used to offset company tax due for the year of payment. If unused for a given year, it may be carried over to the next two succeeding years. 188

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France

118

French corporate tax is assessed on the earnings of “ share capital companies ” (socie´te´ de 118 capital), a category which includes the SA, the SARL, the SAS, and the SCA. Others types of legal entities will be subject to corporate tax by election or by law. 119 There also exist some specific rules concerning: 120 – parent companies and their subsidiaries: dividends received by a subsidiary in which the parent company holds an interest of more than 5% (as defined by Article 145 of the General Tax Code) are not subject to corporate tax; – newly created companies are exempt from the Business License Tax (Taxe Professionnelle) for their first year of existence (see part I.7 d) hereafter); – tax consolidation which is possible, under certain conditions, for companies in which a French parent company (directly or through or with its 95%-owned subsidiaries and sub-subsidiaries) holds at least 95% of the capital (95% of the rights of dividends and 95% of the rights of vote (Article 46 quater. annex III of the General Tax Code)); – interest on loans made by partners or shareholders of a company, which when it is credited to a special account in the company, can be deducted from the profit of the company only under the following conditions: – the stock capital of the company is fully paid up; – the deduction is permitted only to the extent of a statutory interest rate, which was 5.05% for the 2003 calendar year; – in addition, when the lender is either a majority partner or an executive of the company, the deduction is limited to the interest paid, to the extent due for the part of the loan which does not exceed the amount of the capital and a half. This condition does not apply when the lender is the parent company (as defined by Article 145 of the General Tax Code). – since July 1997, all long-term capital gains11 are taxed at the normal tax rate of 33.33% plus surcharge (3% extra surcharge and, for companies whose corporate tax amount is over EUR 763,000 a further 3.3% social tax), except for capital gains on resale of securities acquired as long term investments (which are acquired by a company for a long term possession and to control the issuing company or to exercise some influence in this company) and patent concessions which are taxed on the long term regime at 19% plus surcharge. Although in principle the tax-payer is the sole judge of the opportunity of its tax 121 declaration, the French tax authorities are entitled, with respect mainly to corporate tax, to reassess the consequences of “abnormal acts of management” (acte anormal de gestion) resulting in expenses or losses of profits non justified by the corporate interest of the company; the tax authorities must in principle provide evidence that the concerned act of management was not carried out in the interest of the company.

11

Long-term capital gains are gains related to business assets held for more than two years. In the case of amortizable assets held for more than two years, the capital gain is treated as a shortterm gain (i. e., is taxed as company income) to the extent of the amortized amount, and as a long-term gain with respect to the balance.

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France

b)

Value-added tax (VAT)

III. The Societe Anonyme or SA

122 VAT is now applied in France to almost all transactions that qualify as delivery of goods or supply of services. The scope of VAT is quite large; it is imposed on all “ economic activities ”, any transaction specifically designated as taxable by law, and any exempt activity for which a person may elect liability. VAT is assessed on the total price of the goods and services, taxed on delivery or payment of the price, and paid in the month following the month during which the transaction occurred. 123 Currently, the most applied VAT rate is 19.6%. The VAT paid when goods are obtained (or services hired) is deducted from the VAT that must be paid by the purchaser when these goods (or services) are (re)sold. 124 Moreover, VAT applies to: – the importing of any goods into France; – the furnishing of any services when the main office of the beneficiary’s business activity is in France, it being specified that: – services actually rendered in France are always taxable in France; – the furnishing of intangible services is taxable in France only when certain specific conditions are met; – specific rules apply to the rendering of services from France to the EU countries and vice-versa. 125 Export operations of goods and services are theoretically exempt from VAT, subject to the application of specific rules concerning the EU countries. 126 However, exports of goods to the EU countries are subject to VAT when the purchaser is an individual. In this case, the seller will have to collect and pay the tax. The VAT of the importing country applies, unless the total amount of the sales made by the seller in the purchaser’s country is below a certain threshold,12 in which case VAT will be applied at the French rate. 127 A foreigner carrying out transactions subject to VAT in France must appoint a tax representative in France if he is domiciled in a foreign country. c)

Registration duties

128 Certain transactions involving assets in France (real estate, businesses, securities issued by certain French companies, etc.) are subject to mandatory registration with the Administration of Registration (l’Administration de l’Enregistrement), with payment of registration duties that can be quite substantial. In exceptional cases (such as a unilateral promise to sell real property), the registration within a specified period is a condition for the validity of the instrument.

12

190

This threshold is set up by each country.

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France

129

A registration duty of 1% of the selling price, with a maximum amount of EUR 3,049 129 per transaction, is applicable to the transfers of shares of SAs and SAS. A different tax rate of 4.80 % (with application of an allowance against tax) is applic- 130 able to transfers of shares for SARLs. d)

Miscellaneous taxes

Amongst others, the following taxes can be mentioned: – the Business License Tax (Taxe professionnelle), payable on all professional activity (calculated in proportion to the value of the fixed assets); – local taxes owed in relation to the ownership or use of real estate; – Company Car Tax (Taxe sur les ve´hicules de socie´te´s).

8.

Dissolution/liquidation of an SA

a)

Dissolution

131

An SA may be dissolved for a number of reasons, such as the will of the shareholders, 132 the end of its stated period of duration, the accomplishment of its company’s purpose, the satisfaction of a condition precedent contained in the Articles requiring dissolution, dissolution in conjunction with bankruptcy proceedings, reduction of the number of shareholders to less than seven, reduction of the registered capital to less than the statutory minimum (art. L. 224-2), existence of a net asset value of less than one half of its share capital for a period of two fiscal years (art. L. 225-248) or court-ordered dissolution. The reuniting of all the shares of the capital into a single hand can involve the 133 dissolution of the company. When the sole shareholder has not decided to dissolve the company, any person concerned may apply for that dissolution where the situation has not been regularized within the period of one year. The court may grant the company a maximum period of six months to regularize the situation. It may not rule for dissolution where, on the day when it decides, that regularization has occurred. This type of dissolution involves the universal transfer of the patrimony of the company to the sole member, without there being occasion for liquidation. The creditors may object to the dissolution within a period of thirty days after the recording of the latter. A judicial decision shall dismiss the opposition or order either the payment of the claims, or the constitution of warranties where the firm offers any and where they are considered sufficient. The transfer of the patrimony is carried out and the juridical person vanishes only at the end of the period for opposition or, if there is occasion, where the opposition has been dismissed in first instance or where the payment of the claims has been made or the warranties constituted. These provisions do not apply to companies whose sole member is a natural person.

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134

France

b)

Liquidation of an SA

III. The Societe Anonyme or SA

134 As soon as the decision to dissolve the SA has been taken, and except when the dissolution occurs further to the reuniting of all he shares of the capital of the company into a single hand, the company is under liquidation (art. L. 237-2). The company’s name must be followed by the term «socie´te´ en liquidation». In the absence of provision made in the Articles contemplating the grounds for liquidation, the Tribunal of Commerce may, acting upon petition of any shareholders who has a “legitimate interest” (inte´reˆt le´gitime), the creditors of the company or a representative of the debenture holders of the company, declare a company under liquidation (art. L. 237-14). 135 The liquidation is carried out by one or more liquidators appointed either by the shareholders or, in the event that the dissolution of the SA is ordered by the Tribunal of Commerce, by such Tribunal (arts L. 237-18 through L. 237-20). The liquidator must carry out the formalities of publication (art. L. 237-3), marshal the assets of the company and pay all of its outstanding debts (art. L. 237-24). He may not continue the business dealings of the company, nor enter into new transactions without the express consent of the shareholders or the President of the Tribunal of Commerce which appointed him (art. L. 237-24). Only the liquidator may act for the company and the powers of management are cancelled (art. L. 237-15). The liquidator must, within six months following his nomination, call a meeting of the shareholders at which he must present a report on the status of the company, the progress of the liquidation process and the time necessary to complete the said liquidation (art. L. 237-25). In addition, the liquidator must call a meeting of the shareholders of the company, pursuant to the provisions relating thereto contained in the Articles, within six months from the end of each fiscal year; at such meeting, the shareholders approve the financial statements and reappoint, if necessary, the Supervisory Board, if any, and Statutory Auditor of the company (art. L. 237-25). 136 Once all corporate debts and all shareholders benefiting from special distribution rights have been paid (art. L. 237-29), the liquidator has the authority to distribute corporate assets to the shareholders (art. L. 237-31). 137 Upon termination of the liquidation process, the liquidator must call a meeting of the shareholders to approve the liquidation and to declare the company definitely liquidated (art. L. 237-9). After such meeting, the company ceases to exist as a legal entity (art. L. 237-2). 138 The liquidator is compensated pursuant to the decision of the Tribunal or the shareholders appointing him. The liquidator is liable to the company, shareholders or any third party that has suffered damages because of his intentional or negligent acts or omissions (art. L. 237-12). 139 Criminal sanctions may also be imposed on the liquidator in certain circumstances.

192

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1. Character of the SAS

France

140

IV. The socit par actions simplifie or SAS 1.

Character of the SAS

This new simplified type of company was created by a law of January 3, 1994. The main 140 advantage of an SAS is its flexibility with regard to the organisation of management powers. Apart from this aspect, an SAS functions merely like an SA. SAS are recommended when creating joint ventures in France or when it is plan that it 141 will be 100 % owned by its mother company.

2.

Formation

An SAS may be formed ex-nihilo or via the transformation of an existing company as 142 long as such transformation is unanimously approved by the shareholders of the existing company and the latter is in compliance with the requirements relating to SAS at the time of the transformation (art. L. 227-3). The minimum share capital of an SAS is EUR 37,000.

3.

Shareholders

a)

Rights and duties of shareholders

143

Companies or individual may be shareholders of an SAS (art. L. 227-1). An SAS may be 144 formed with one shareholder only. The SAS is prohibited from making public offerings (art. L. 227-2). Each shareholder of the SAS is liable for the debts of the SAS only to the extent of his capital contributions thereto (art. L. 227-1). Shareholders of an SAS wishing to assure the maintenance control, a certain share- 145 holding ratio may insert specific clauses to this effect in the Articles. The insertion of these clauses within the Articles render them enforceable against third parties. As a specifity, Articles can provide that a shareholder may be forced to sell its shares 146 under certain conditions. b)

Shareholders decisions

Great flexibility is accorded to the form that shareholder decisions may take and the 147 conditions applicable to the making of such decisions (art. L. 227-9). In particular, the Articles determine the manner in which decisions that require shareholder approval are to be taken. In the event that meetings have to be held, the Articles set forth the rules governing the convening of such meetings, quorum requirements, proxy rules and the information that must be furnished to the shareholders in connection with the meeting. Cecilia Della Berta

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France

IV. The socit par actions simplifie or SAS

148 Decisions relating to the following, deemed essential, may only be made by the shareholders, in particular: increases or reduction of capital, redemptions of shares, mergers, spin-offs or partial spin-offs, dissolution, transformation in another corporate form, the annual financial statements and profits, the appointment of statutory auditors (art. L. 227-9). 149 In addition, the Articles may determine the allocation of the voting rights among the shareholders. Voting rights need not be proportionate to the equity interest held by the respective shareholders. 150 Although the Articles may establish the voting majority required for most types of decisions, a unanimous vote of the shareholders is necessary to adopt or modify the Articles where, in particular, the following are concerned: a temporary non-transferability clause; an approval clause (clause d’agrement); a squeeze out clause and the suspension of a shareholder’s voting rights or a shareholder’s exclusion following a change in control over the shareholder (art. L. 227-19). Absent contrary provision in the Articles, a unanimous vote of the shareholders is also required with respect to the appointment and renewal of a liquidator in the event of the SAS’s dissolution (art. L. 237-18). 151 Where the SAS has only one shareholder, shareholder decision must be taken by the latter (art. L. 227-1); the sole shareholder may not delegate his powers (art. L. 227-9). All decisions made by the sole shareholder are recorded in a special register established for the said purpose. The Chairman of the SAS establishes the financial statements and prepares the management report; the sole shareholder approves the financial statements subsequent to the submission of the report of the statutory auditor and within six months from the end of the fiscal year. Any action taken in violation of the rules herebefore mentioned may be declared void upon petition of any interested party.

4.

The SAS shares

a)

Classes of shares

152 The Articles of the SAS can provide for different classes of shares. The classes applying to SAs also apply to SAS (please refer to part I. 4.1 herebefore). b)

Transfer of SAS shares

153 SAS shares are negotiable. The non-transferability of the shares may be set forth by the Articles for a maximum duration of ten years in order to protect the SAS from political changes. Such clause can only be challenged with the unanimous consent of the shareholders.

194

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5. Management of the SAS

France

154

Approval clause (clause d’agrement) may also be inserted in the Articles. Where, fol- 154 lowing a refusal of transfer of the shares by a shareholder to a third party or another shareholder, the shares are bought by the SAS, the company must resell them or cancel them within a six-month period.

5.

Management of the SAS

a)

Management

The organization of management of the SAS is freely determined in the Articles. The 155 only management body required in an SAS is the Chairman, who is appointed to represent the company in its dealings with third parties (art. L. 227-6). A company may be appointed Chairman of the SAS. The Articles may stipulate the circumstances in which one or more persons other than 156 the Chairman, having the title of General Manager or Deputy General Manager, may exercise the powers conferred on the Chairman. The Articles determine the procedure for appointing and removing of the Chairman as 157 well as the term of office and the renewal thereof. The Chairman wages may be set forth in the Articles or left to a vote of the shareholders. The powers of the Chairman to act for and on behalf of the company are plenary, 158 limited only by the corporate purpose (art. L. 227-6). The Chairman actions bind the company even by actions outside the scope of the corporate purpose unless it can be shown that the third party in question knew that the act of the Chairman was not within the corporate purpose. In addition, the limitations imposed upon the powers of the Chairman by the Articles 159 are not enforceable against third parties (art. L. 227-6). In the event that the management duties are not to be conducted solely by the Chair- 160 man, the Articles determine the nature and number of management bodies to be established. For example, the Articles can provide for a body comparable to the Board of Directors or Directorate of an SA, or any other type of board or committee with decision-making or powers. The minimum or maximum number of members of management as well as the procedure of appointment and removal of the said members, their term of office and their renewal, their remuneration may be fixed by the Articles. A legal entity may be a member of management of an SAS. The Articles also provide for the organization of management meetings such as the 161 manner in which they are called, quorum requirements, place and frequency of meetings, voting majority, and proxy rules. The powers of the member of management have to be specified in the Articles or may be result of a shareholder decisions or delegation of powers delivered by the Chairman.

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162

France

b)

Conflict of interests

IV. The socit par actions simplifie or SAS

162 As a general rule, agreements may be entered into by the SAS, directly or indirectly, with its Chairman or one of the other member of its management where such agreements relate to the “normal operations” of the SAS and are entered into upon “normal terms” (art. L. 227-11). Where an agreement is entered into by the SAS with the Chairman, a member of its management, one of its shareholder holding more than 10 % of the voting rights, or the company controlling such latter shareholder, directly or indirectly, which is not within the normal scope of the company’s activities or which is not at arm’s length, such agreement must be submitted to the shareholders’ approval (art. L. 227-10). 163 Yet, an agreement which is not approved by the shareholder is valid; however the interested party and eventually the Chairman and the member of management must bear the financial consequences that the company may have suffered consequently to this agreement (art. L. 227-10). 164 Notwithstanding the above, there is a total prohibition against the SAS making any loan, granting an overdraft protection for, or otherwise securing obligations owing to third parties by the Chairman or other members of management of the SAS if these persons are individual and not companies (art. L. 227-12 and L. 225-43). c)

Liability of management

165 The Chairman and the other members of management, if any, of the SAS, are subject to the same rules governing civil liability as the members of the Board of Directors or Directorate of an SA (art. L. 227-8). With respect to criminal liability, the Chairman and the other members of management are subject to the same penalties as the Chairman, Directors and General Manager of an SA (art. L. 244-1). It should also be noted that in the event the Chairman or the member of management of the SAS are legal entities, the officers and directors of such legal entities are jointly and severably liable with the legal entity (art. L. 227-7).

6.

Accounting

a)

Book-keeping and annual financial statements

Please refer to part I.6. 1. herebefore. b)

Statutory auditors

166 The SAS must have one or more statutory auditor whose principal function is to ensure that the company complies with certain provisions of company law and to certify the fairness and accuracy of the financial statements of the company as well as the accuracy of all financial data submitted to the shareholders (art. L. 225-235). The statutory auditors are appointed by the shareholders (art. L. 227-9). The rules governing the 196

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167

number of auditors that must be appointed, as well as their powers, remuneration and liability are the same as those that apply to statutory auditors of an SA.

7.

Taxation

Please refer to part I. 7. herebefore.

8.

167

Dissolution/termination

The dissolution/liquidation rules applicable to the SA also apply to SAS. Please refer to 168 part I. 8. herebefore.

V.

The socit responsabilit limite or SARL

1.

Character of the SARL

A SARL is a company normally formed of at least two, but no more than one hundred 169 persons (art. L. 223-3), created for a commercial purpose. However, a SARL may be created by, and may continue to exist with, only one share- 170 holder. A SARL with only one shareholder is known as an enterprise unipersonnelle a` responsabilite´ limite´e or EURL. A EURL is considered to be a special type of SARL and is subject to the regulations applied to SARL unless specifically indicated otherwise by the law. The EURL may not have a EURL as sole shareholder (art. L. 223-5).

2.

Formation

The SARL is technically formed at the time of signature of the Articles by all of the 171 initial shareholders. It should be noted, however, that the SARL does not acquire full legal existence and, as a consequence, cannot enter into contracts in its own name, until such time as it is registered with the Trade and Companies Register of its place of incorporation (art. L. 210-6). a)

Preparation of the Articles

The Articles may contain such provisions as the shareholders desire, but must, in all 172 cases, contain provisions as listed hereafter. aa)

Form

The shareholders elect to associate themselves by forming an SARL.

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174

France

V. The socit responsabilit limite or SARL

bb) Name

174 Designation of the name of the SARL, which name must always be accompanied by, but need not include, the words socie´te´ a` responsabilite´ limite´e or the intials “SARL” and a statement of the company’s registered capital (art. L. 223-1). In order to avoid possible infringement of, or confusion with, third parties’ trademarks or corporate names, it is advisable to verify, at the outset, the availability of the proposed name of the SARL. cc)

Duration

175 Recital of the duration of the SARL, which duration cannot exceed 99 years, with possible renewal like in an SA (please refer to part I. 2. a) cc)). dd) Registered Office

176 Recital of the address of the registered office of the SARL. ee)

Purpose

177 Statement specifying the purpose of the SARL; mere reference to “any commercial, financial or industrial activity” is not sufficient and a more specific recital of the nature of the proposed corporate activity is required. ff)

Registered capital

178 Declaration of the registered capital of the SARL which may not be less than EUR 1. 179 The share capital of an SARL is divided into shares called ‘‘parts sociales’’. An SARL is prohibited from making public offerings of its shares, but may issue nominative bonds without making public offerings. However this possibility is reserved to SARL of certain importance (SARL which have appointed statutory auditors and for which the accounts for the three past years have been duly approved by the shareholders). gg) Statement of shareholding and payment of subscription price

180 The identity and shareholding of each shareholders must be mentioned in the Articles. 181 If shares to be issued against capital contributions are made in kind, an evaluation of such contributions must be set forth in the Articles (art. L. 223-9). If shares are to be issued against a contribution in services (apport en industrie), the Articles must set forth the conditions governing the said contribution (art. L. 223-7). 182 In addition to the provisions mentioned herebefore, the Articles should contain all clauses necessary to allow proper functioning of the SARL, such as the method of appointment of the Manager (Ge´rant) (please see below), the powers of the Manager, the rules governing the transfer of shares, the rules governing the decisions of the shareholders, etc. 183 Furthermore, a recital of all contracts entered into and of the commitments and obligations assumed by the initial shareholders in the name of the corporation before the signature of the Articles must be annexed to the Articles. The initial shareholders who acted in the name of the SARL are personally jointly and severably liable for all such 198

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France

184

obligations until such time as the SARL is fully incorporated; such obligations are then considered as ratified and as having been entered into ab initio by the SARL. If, however, the aforesaid recital of obligations omits one or more obligations incurred 184 by the initial shareholders, such obligations may be subsequently ratified by the shareholders (art. L. 210-6). The start-up of the company may require that certain acts be taken on behalf of the 185 SARL-in-formation after the signature of the Articles but before the registration of the company with the Trade and Companies Register. Those shareholders who act on behalf of the company after the signature of the Articles but before the aforesaid registration are jointly and severally liable for all such actions unless: (i) such acts have been authorized in an annex to the Articles or within a separate decision of the shareholders, in which case, once the SARL is duly registered, they are deemed to have been entered into ab initio by the SARL, or (ii) the shareholders, after the registration of the SARL, specifically ratify the said actions.13 b)

Subscription and Payment of the registered capital

The total number of shares created must be subscribed by the shareholders. They must 186 be fully paid in if they represent contributions in kind. At least one fifth of the face value of shares representing contributions in cash must be paid in. The balance may be paid in one or more payments at the Manager’s discretion, within a deadline which may not exceed five years with effect from registration of the company in the commercial and companies register. However, the registered capital must be paid in full before any new shares may be subscribed in cash for the transaction to be valid. Payment in cash for shares subscribed for must be made either to the Caisse des depots et 187 consignations, to a notaire, to a bank account opened in the name of the company-information or, as is more frequently the case, to one of the persons overseeing the incorporation of the SARL who is in turn obligated to remit the same within eight days to one of the three foregoing depositaries. Such funds may not be withdrawn by the company until the incorporation process is 188 completed (art. L. 223-8). c)

Leasing or Purchasing a Registered Office

Inasmuch as mention must be made in the Articles of the location of the registered 189 office of the SARL, it is necessary to either execute a lease agreement relating to or to purchase commercial property where the company will maintain such office.

13

Art. L. 210-6.

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190

France

d)

Signature of the Articles

V. The socit responsabilit limite or SARL

190 The Articles must be made in writing and may be signed either sous seing prive´ or before a notaire. The signature of the Articles before a notaire is mandatory when contributions in kind in the form of rights to real property are made. e)

Appointment of the Manager

191 After the signature of the Articles, the shareholders must appoint one or more Managers (ge´rants) if such appointment has not been made in the Articles. f)

Formalities of Registration and Publication

192 The incorporation process of an SARL is completed by the accomplishment of the appropriate formalities of registration and publication which are similar to those required for the incorporation of the SA. g)

Withdrawal of Paid-In Capital

193 Funds arising from the payment of shares may not be withdrawn by the company’s proxy holder before it is registered in the commercial and companies register (art. L. 223-18). 194 Immediately after the registration of the company with the Trade and Companies Register, the SARL must set up accounting books (livres de commerce). The SARL must also set up certain corporate books (registres sociaux).

3.

The Shareholders

a)

Rights and duties of the shareholders of the SARL

195 The duties of the SARL shareholders are limited: they must pay up their contributions in the share capital, such contribution setting their level of liability. They must not act against the corporate interest (inte´reˆt social) in abusing of their rights as minority or majority shareholders. 196 The rights of the shareholders mostly consist of: (i) receiving dividends (this right does not call for specific comments); (ii) transferring their shares under certain conditions (this matter will be studied hereafter in 4.2); (iii) accessing to corporate information. 197 As regards the right to access to information, all shareholders of an SARL have the right to consult, at the registered office of the company, documents relating to the past three fiscal years of the company’s life. These documents are in particular the financial statements, the inventory lists, the reports submitted to shareholders and the minutes of shareholders meetings. 200

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France

198

Furthermore, in connection with the calling of each annual ordinary general meeting of 198 the shareholders, the Manager of an SARL must supply to each shareholder with the documents relating to the fiscal year to which such meeting relates. These documents are in particular the inventory list, the financial statements, the report of the Manager on the operations of the company during the past fiscal year, the text of resolutions proposed for adoption by the shareholders, and if appropriate, the report of the Statutory Auditor, the consolidated accounts and group annual report. With the exception of the inventory list, all documents must be sent to the shareholders no later than fifteen days before the Annual General Ordinary Meeting of the Shareholders. Upon receipt of such documents, each shareholder has the right to submit written questions to the Manager who, in turn, must respond to these questions during the meeting. b)

Shareholders meetings

The most important decisions can only be taken by the shareholders by way of general 199 meeting. However, the Articles may specify that, with the exception of the decisions approving annual accounts, all or certain decisions may be taken by consultation by exchange of letters of the members or may result from the consent of all the members expressed in a deed. Each share entitles the holder to one vote at meetings.

200

The members are usually summoned to the shareholders’ meetings by the Manager or, in 201 the absence thereof, the auditor if one has been appointed. One or more members holding half the company’s shares or holding a quarter of the 202 company’s shares if they represent at least a quarter of the members may request the convening of a shareholders’ meeting. Any member may apply to the Court for the appointment of a proxy charged with 203 convening a shareholders’ meeting and determining its agenda. Any irregularly convened shareholders’ meeting may be cancelled. However, nullity 204 proceedings shall be inadmissible if all members were present or represented. Each shareholder shall be entitled to participate in the decisions and shall have a 205 number of votes equal to that of the company’s shares they hold. If there are more than two members, a member may mandate another member to 206 represent them. Shareholders may not mandate any person other than those permitted by the Articles. 207 A member may not mandate another person to vote a proportion of their shares and 208 vote the other proportion in person.

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209

aa)

France

V. The socit responsabilit limite or SARL

Ordinary General Meetings of the Shareholders

209 All decisions not specifically reserved to the competence of the Extraordinary General Meetings may be taken at an Ordinary General Meeting of the Shareholders. 210 The responsibilities of the Ordinary General Meeting also include: – the appointment and removal of the Manager(s) and the fixing of his (their) remuneration, – the approval of the annual accounts and the allotment of profits during the annual general meeting which must meet, not on a fixed date mentioned in the Articles, but within the six months following the end of the business year, – the approval of operations exceeding the powers of the Manager, – approval of agreements which could have been made under conflict of interests. 211 Decisions are taken by the shareholders of an Ordinary General Meeting by the simple majority vote of all shares. bb) Extraordinary general meetings of the shareholders

212 Extraordinary General Meetings of the Shareholders are held mainly to amend the Articles of the company. 213 Such meetings can also be held in case of decisions relating to the transfer of shares where authorisation is required. 214 As a general rule, decisions taken at such meetings require the affirmative vote of threequarter of the capital of the SARL. 215 If one or more members holds the following amounts of shares: – more than three quarters – they have absolute control over ordinary and extraordinary decisions, – more than half – they only have control over ordinary decisions, i. e. more specifically, the appointment and removal of the Manager and approval of the annual accounts, – more than a quarter – they have a minority blocking vote in extraordinary decisions, – less than a quarter – they can oppose themselves neither ordinary nor extraordinary decisions. 216 The allocation of shares which determines majority thresholds during meetings must be closely studied when the company is set up and when shares are subsequently transferred.

202

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4. SARL Shares

4.

SARL Shares

a)

General Rules

France

217

Shares of an SARL are called ‘‘parts sociales’’. All shares must be of equal value. A SARL 217 may not validly issue securities. Any such issue shall be null and void. Furthermore, the shares may not be represented by negotiable securities. b)

Transfer of shares

Shares may be freely transferred between members, spouses, ascendants and descen- 218 dants. They may be freely passed on by succession or as a result of the division of jointly owned property (unless provided otherwise by the articles of association of the company.) The shares can be sold to third parties who are alien to the company only with the 219 consent of a majority of the shareholders representing at least half of the capital shares (unless the Articles provide for a higher majority vote). When the company has more than one shareholder, the proposal to sell is notified to 220 the company and to each of the shareholders. If the company has not made its decision known within three months with effect from the date of the last of the notifications referred to in the present paragraph, consent for the sale is deemed to have been given. If the company has not given its consent for the sale, the shareholders are required to 221 buy, or to arrange the sale of, the shares at a price determined as prescribed in Article L. 1843-414 of the French Civil Code within three months of the date of refusal. Any clause which is contrary to Article L. 1843-4 of the said code is deemed not to exist. Such period may be extended to up to six months, once only, by a decision of the Court. With the consent of the selling shareholder (due to heavy tax consequences), the 222 company may also decide, within the same timeframe, to reduce its capital by the amount of the nominal value of that shareholder’s shares and redeem them at a price determined as prescribed above. If duly justified, a decision of the Court may allow the payment to be deferred for a maximum of two years. The sums owed bear interest at the legal rate for commercial transactions. If none of the solutions referred to in the third and fourth paragraphs above has been 223 implemented within the allotted timeframe, the partner is free to proceed with the sale initially envisaged.

14

Art. 1843-4 of the French civil Code: “In all cases considering the assignment of a member’s rights in the firm, or the redemption of those rights by the firm, the value of those rights shall be determined, in case of dispute, by an expert appointed, either by the parties, or failing an agreement between them, by order of the president of the court who shall decide by way of interim relief proceedings and whose decision shall be final.”

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224

France

V. The socit responsabilit limite or SARL

224 Any clause contrary to the provisions of the present Article is deemed not to exist. 225 The transfers of shares in an SARL must be made by a written instrument. The transfer is effective against the company only if the latter has been informed thereof either by the filing of the original deed of transfer at the company’s registered office with acknowledgment of receipt from the Manager, or by notification by a bailiff, or by acceptance by the company in a notarized deed. Furthermore, the transfer is binding upon third parties only upon filing with the Trade and Companies Register in two original copies. 226 The transfer of shares of a SARL triggers transfer duties of 4.8% (after applying an allowance against tax) assessed on the transfer price.

5.

Management of the SARL

a)

Choice of the Manager

227 An SARL is managed by one or more natural persons, who may or may not be a shareholder. They may be appointed in the Articles or by ordinary decision of the shareholders (i. e. representing more than half of the capital) for an unspecified or limited period. 228 The Managers are appointed and dismissed by the shareholders gathered in a general meeting or, as the case may be, by the sole shareholder. If the Manager is dismissed without a cause, the Manager may claim damages for wrongful dismissal. Mismanagement, incompetence or physical disability of a Manager would generally constitute grounds for dismissal. 229 If the Manager is not a national of one of the member states of the European Union or of the OECD, he must obtain from the French authorities a carte de commerc¸ant e´tranger (foreign trader’s permit) before taking up his functions unless he holds a French resident permit (carte de re´sident). b)

Status of the Manager

230 The Manager of an SARL manages the company and represents it; the prerogatives of the Manager are limited by the powers devolved by law to the shareholders. 231 It is allowed to combine the position of Manager with an employment contract, but only in so far as: – the employment contract relates to a real function and has not been concluded with a view to sidestepping the liability rules applicable to Managers; – there is a clear distinction between the technical duties specified in the contract of employment and the management duties deriving from the office of Manager; – the contract of employment provides for separate remuneration;

204

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232

– the person in question can prove that he is subordinate to the company, which implies that he is either a member having a minority holding or a non-member and that his powers as Manager are restricted. In practice, every caution must be taken to ensure that the validity of the employment 232 contract is recognised, particularly by the social security administration. c)

Functions of the Manager

In dealings with shareholders, the powers of the Managers shall be determined by the 233 Articles. In dealings with third parties, a Manager shall be vested with the most extensive powers 234 to act on behalf of the company in all circumstances. Internal limitations of powers may be provided for in the Articles (e. g. prior approval of shareholders in respect of certain decisions) but such limitations are not binding upon third parties, unless it can be proven that said third party was aware of the limitation of powers (the mere fact that the Articles are publicly available being not sufficient in that respect). d)

Liability of the Manager

Managers shall be jointly or severally liable, according to the circumstances, to the 235 company or to third parties for breaches of the legislative or regulatory provisions applicable to limited liability companies, for breaches of the Articles, and for their act of mismanagement. In addition to proceedings for compensation of prejudice suffered personally, the share- 236 holders may instigate civil liability proceedings against the Manager. The plaintiffs shall be authorised to pursue compensation for the entirety of the prejudice suffered by the company to which, if applicable, damages may be granted. Any clause in the Articles having the effect of subordinating the exercise of civil 237 proceedings to prior notice to or authorisation of the shareholders’ meeting, or which contains a waiver of the exercise of these proceedings shall be deemed null and void. No decision by the shareholders’ meeting may have the effect of extinguishing civil 238 liability proceedings against the Manager for mistakes committed in the performance of their office. Managers may also be subject to criminal penalties.

239

As a general rule, agreements may be entered into by a company, directly or indirectly, 240 with one of its shareholders or its Managers where such agreements relate to the “normal operation” of the company and are concluded upon “normal terms”. Where, however, an agreement is entered into by the company and its Manager or one 241 of its Shareholders which is not within the normal scope of the company’s activities or Cecilia Della Berta

205

242

France

V. The socit responsabilit limite or SARL

which is not at arm’s length, such agreement must be submitted to the approval of the Ordinary General Meeting of Shareholders. The Manager or the concerned shareholder cannot participate in the vote. If the agreement is not approved by the General Meeting of Shareholders, it will nevertheless continue to be applicable with respect to third parties, but the Manager or shareholder concerned will be liable for any damages suffered by the SARL. 242 Furthermore, agreements which are not within the normal scope of the company’s activities or which are not at arm’s length concluded between the company and its Manager where the Manager is not a shareholder of the company, However, should no auditor have been appointed, are subject to the prior approval of the shareholders’ meeting.

6.

Accounting

a)

Book-keeping and annual financial statements

243 Please refer to part I.6. a) herebefore. b)

Audit requirements

244 As a rule, a SARL does not have to appoint one statutory and one alternate auditor, unless two of the three followings criteria are met at the end of a given fiscal year: – the total amount of the balance sheet of the SARL exceeds EUR 1,550,000; – its total sales turnover exclusive of sales taxes exceeds EUR 3,100,000; – the average number of employees for the fiscal year exceeds 50. 245 The auditors are appointed by the ordinary general meeting of the shareholders for six fiscal years. c)

Disclosure

246 As is the case with an SA, the Articles of an SARL and any amendments thereof, as well as the approved accounts, must be filed with the Tribunal of Commerce. However, unlike the SA, the contract of share transfer must be filed with the Tribunal of Commerce and to the registered office of the company. Third parties may therefore learn, at any time, the identity and shareholdings of the shareholders of an SARL.

7.

Taxation

247 As is the case with an SA, SARL are subject to corporate income tax. However, SARLs with only one shareholder who is an individual may elect to be transparent for tax purposes. Thus, the said shareholder is subject to income tax, in lieu of the SARL, on the SARL’s net taxable income, whether or not such income is actually distributed. Similarly, said shareholder may deduct the SARL’s losses from its taxable revenue. 206

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8. Dissolution and liquidation of the SARL

8.

Dissolution and liquidation of the SARL

a)

Dissolution

France

248

The SARL may be dissolve for the same reasons as for the SA.

248

The SARL may also be dissolved: – where the number of shareholders of the SARL exceeds one hundred, and where the transformation of the company into SA has not been carried out; – where the net value of an SARL, as indicated in its financial statements, falls below one half of its registered capital, and where no remedial steps have been taken at the end of a two-year period.

249

b)

Liquidation

Please refer to part I.8 b).

250

VI. Other types of business entities 1.

General partnership (socit en nom collectif – SNC)

The SNC requires at least two shareholders (individuals or legal entities). The share- 251 holders have the capacity of traders (commerc¸ants), and are indefinitely, jointly and severally liable for the debts of the SNC; certain limitations on their liability specified in the Articles are not binding upon third parties. However, a creditor cannot sue the shareholders unless it has first unsuccessfully sued the company. There are no minimum capital and no minimum nominal value requirements for the 252 shares. The SNC is managed by one or more Managers (Ge´rants), who do not have to be 253 shareholders and who may be legal entities. Shareholders’ decisions must be unanimous unless the Articles provide otherwise. As a rule, the SNC does not have to appoint a statutory auditor unless it meets the 254 criteria described for the SARL. Unless otherwise provided in the Articles, shares may be transferred only with the 255 unanimous approval of the shareholders. Such transfer must be recorded in a written deed, and is subject to a registration duty of 4.80 % as in the case of a transfer of shares of an SARL. The SNC may engage in commercial and civil activities.

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207

257

France

VI. Other types of business entities

257 The shareholders are taxed on the profits of the SNC, each in proportion to his share in the capital of the SNC, unless the SNC has chosen to be taxed for corporate tax.

2.

Limited partnership (socit en commandite)

258 There are two types of limited partnerships: the regular limited partnership (socie´te´ en commandite simple – SCS) and the limited partnership that is authorised to issue shares (socie´te´ en commandite par actions – SCA). The two have comparable structures: – on the one hand, the general partners (commandite´s) have the status of traders, have indefinite and joint and several liability for the debts of the partnership, and have sole control over the management of the partnership; – on the other hand, the liability of the limited partners (commanditaires) is limited to their contribution and they do not participate in the management of the partnership. 259 With respect to their other rights, limited partners of an SCS are treated like shareholders in an SARL, while in the SCA they are treated like the shareholders of a SA. 260 The SCA is managed by one or more Managers (Ge´rants), who may be legal entities. Generally, the Managers are the general partners. The Managers report to a Supervisory Board which is appointed at the regular general meeting of partners (the general partners being restricted from voting). The SCA must appoint at least one statutory auditor. The shares held by the limited partners are transferable, under the same rules as the shares of an SA. Unless otherwise provided in the Articles, the shares of a general partner may be transferred only with the unanimous consent of the limited and the general partners. The minimum capital of an SCA is EUR 37,000. 261 The SCS is governed by similar rules, except that the shareholdings of the limited partners are treated in the same way as the shares of an SARL and that there is Supervisory Board in a SCS. 262 Specific tax rules apply to the SCS and the SCA. The latter is subject to corporate tax on all its profits. 263 The SCA form (and on occasion the SCS form) can be chosen when the intent of the shareholders is to clearly separate the managing partner(s) from the other partners who do not wish to be involved in management. In practice, the main disadvantage of the unlimited joint and several liabilities of the general partners is attenuated when the general partners are companies with limited-liability.

3.

Socit en participation

264 This vehicle is generally chosen in joint ventures when one partner wishes to cooperate with other partners on a confidential basis in limited sectors of activity and to share profits and losses resulting therefrom. The partners can then choose a Manager (Ge´rant) 208

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4. Economic Interest Grouping (Groupement d’IntrÞt Economique – GIE)

France

265

from among themselves or outside to manage the socie´te´ en participation and to appear officially. Socie´te´s en participation are generally not disclosed to third parties (although this is 265 possible), but they must be disclosed to the French tax authorities. A socie´te´ en participation has no legal personality and therefore does not exist as an entity 266 separate from the shareholders. Each shareholder (and more generally the Manager) contracts in its own name and is personally liable towards third parties (unless the socie´te´ en participation is disclosed to such third parties, in which case the shareholders are jointly and severally liable for the debts of the socie´te´ en participation). The profits of a socie´te´ en participation are, in principle, taxable only at the level of the 267 shareholders.

4.

Economic Interest Grouping (Groupement d’IntrÞt Economique – GIE)

The GIE is a very flexible legal structure of cooperation between partners known as 268 “members” (who may be legal entities) with respect to a portion of their activities. The purpose of the GIE must be an extension of the activity of its members. The GIE operates like a partnership. It may be formed without capital.

269

The members of the GIE are in theory jointly and severally and indefinitely liable for 270 the debts of the GIE. This means that any creditor of the GIE may demand payment of its claim on the GIE from each member of the GIE, after having served demand for payment upon the GIE. In practice, to avoid the harshness of this rule, it is advisable to limit the purpose of the GIE and the powers of the Manager(s), although limits to such powers are not binding towards third parties. In addition, the Articles may provide that the liabilities of the GIE are to be borne in proportion to the number of shares held by each member (although such limitation will be valid only among the members); consequently, in case one member is sued for the entire amount of a debt of the GIE, such member may then claim reimbursement of the debt from all the members in proportion to the number of each member’s shares. Another way of avoiding joint and several liability of the members is to include in every 271 contract between the GIE and a third party a clause in which the other party expressly waives the benefit of joint liability; in such case the other party will be entitled to demand reimbursement of its debt over the GIE from each member only in proportion to the number of shares of such member. The GIE is in theory a non-profit grouping; while it can earn profits, the profits will be 272 taxable in the hands of its members.

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209

Germany Frank Dornseifer

Table of Contents I.

Introduction

1.

The System of Commercial Business Forms in Germany Sole Proprietorship („Einzelkaufmann“) Partnerships („Personengesellschaften”) Limited Liability Companies/ Corporations („Kapitalgesellschaften”) Branch („Zweigniederlassung”) Summary of Commercial Business Forms in Germany

a) b) c) d) 2.

II. The Stock Corporation – AG 1. Character of the AG 2. Formation of an AG a) Formation Procedure aa) Execution of the Formation Documents bb) Original Shareholder Contributions and their Payment cc) Preparation of a Formation Report and Formation Audit b) Registration Procedure/ Commercial Register c) Governmental Permission d) Cost/Duration e) Establishment of an AG by Transformation f) Requested Information on Business Letters/Stationery 3. The Shareholder/the Shareholder Meeting a) Rights and Obligations of a Shareholder b) Shareholder Meetings/Shareholder Resolutions

Frank Dornseifer

215 215 216 216 217 217 218 218 218 220 220 220 221 222 223 226 226 226 227 228 228

4. The AG Share a) Classes of Shares b) Transfer of Shares /obligations concerning substantial shareholdings c) Own Shares 5. The Articles of Association a) Mandatory Content aa) Name of the Corporation and its Registered Office bb) Business Object cc) Amount of Share Capital and its Dissection, Types of Share Certificates dd) Information Concerning the Management Board ee) Information Concerning Public Notices b) Additional Provisions of the Articles of Association c) Amendment of the Articles of Association aa) Formally Recorded Shareholder Resolutions bb) Registration with the Commercial Register d) Capital Increase/Decrease aa) Capital Increase bb) Capital Decrease 6. Management Board a) Constitution of the Management Board b) Management and Representation c) Responsibilities and Personal Liability of Members of the Management Board d) Other Representatives of an AG

233 234 234 236 236 236 236 237

237 237 237 238 238 238 238 239 240 243 244 244 246

247 248

230

211

Germany 7. Supervisory Board a) Function, Powers and Responsibilities b) Composition and Appointment, Co-Determination c) Qualifications 8. Selected Capitalisation and Liability Questions Concerning the AG a) Prohibition of Repayment of Shareholder Contributions b) Capital-Substituting Loans c) Liability Risks in the Context of Insolvency 9. Financial Reporting/Audit and Disclosure Requirements a) Financial Reporting b) Audit Requirements/Disclosure 10. Taxation 11. Dissolution of a Corporation/ Termination of the Business 12. Limited Partnership with Share Capital – KG a. A. a) Formation/Constitution b) Change of General Partners and Limited Shareholders, Dissolution c) Taxation, Financial Reporting/ Audit Requirements

Table of Contents 248 248 249 250 251 251 251 252 252 252 255 256 259 261 261 262 263

III. The Limited Liability Company –

GmbH 1. Character of the GmbH 2. Formation of a GmbH a) Formation Procedure aa) Execution of the Formation Documents bb) Original Shareholder Contributions and Their Payment Prior to Registration b) Registration Procedure/Commercial Register c) Governmental Permission d) Shelf Companies e) Cost/Duration f) Requested Information on Business Letters 3. The Shareholder a) Rights and Duties of a Shareholder

212

263 263 264 264 264

265 267 268 268 269 269 269 270

b) Shareholder Resolutions/Shareholder Meetings 4. The GmbH-Share a) Classes of Shares b) Transfer of Shares/Legal Requirements/Cost c) Own Shares 5. The Articles of Association a) Mandatory Content aa) Company Name and its Registered Office bb) Business Object cc) Share Capital and Amount of Shareholder Contributions b) Additional Provisions of the Articles of Association c) Amendment of the Articles of Association aa) Formally Recorded Shareholder Resolutions bb) Registration with the Commercial Register d) Capital Increase/Decrease 6. Management Board a) Managing Directors b) Management and Representation c) Responsibilities and Personal Liability of Managing Directors d) Other Representatives of a GmbH 7. Supervisory Board a) Mandatory/Optional Supervisory Board b) Composition and Responsibilities of the Supervisory Board c) Qualifications d) Consultative/Advisory Council 8. Selected Capitalisation and Liability Questions Concerning the GmbH a) Prohibition of Repayment of Shareholder Contributions b) Capital-Substituting Loans c) Liability Risks in the Context of Insolvency 9. Financial Reporting/Audit and Disclosure Requirements a) Financial Reporting b) Audit Requirements/Disclosure

271 272 273 273 274 274 275 275 275 275 276 276 276 277 277 280 280 282 282 283 283 283 284 286 286 286 286 286 287 287 287 288

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Index 10. Taxation 11. Dissolution of a Company/ Termination of the Business 12. GmbH & Co. KG

Germany 288 288 290

a) Formation/Constitution b) Change and Withdrawal of Partners, Dissolution c) Taxation/Financial Reporting

291 293 293

Index Accounting Supervisory Authority 88 Advisory Council 168 Annual Financial Statements AG 34, 71, 79 et seq. GmbH 172 et seq. Appointment of Auditors 36 of Management Board 62, 155 of Supervisory Board 73, 164 Appropriation of Profits 34 Approval Requirements 24, 118 Articles of Association AG 14, 31 et seq., 44 et seq., 52 et seq. KG a. A. 100 et seq. GmbH 107 et seq., 137 et seq. Audit Requirements 87 et seq., 174 Authorized Capital 58 Balance Sheet AG 79 et seq., 98 GmbH 172 Bearer Shares 39, 41 Bookkeeping 79, 172 Branch 9 Business Letters 28, 122 Capital Increase AG 55 et seq. GmbH 147 et seq. Capital Decrease AG 60 GmbH 152 Capital Substituting Loan 77, 170 Chamber of Industry and Commerce 21, 114 Change of legal Form 26 Change of Partners 102 Co-Determination 62, 73, 155, 166 Commercial Register AG 19 et seq., 54 et seq. GmbH 112 et seq., 146 et seq., 155, 177

Frank Dornseifer

Company Name 45, 138 Consolidated Group of Companies 80 Contribution and Maintenance of the Share Capital 76, 169 Corporate Governance Code 31, 68, 71 Corporation 10 et seq. Corporate Income Tax 92 et seq. Disclosure 87 et seq., 174 Disregarded Entities 7 Dissolution AG 96 et seq. KG a. A. 102 et seq. GmbH 176 et seq. GmbH & Co. KG 184 et seq. Dividends 31 et seq. Dividend Withholding Tax 94 European Company, SE 11, 16 Exclusion of Shareholders AG 30 GmbH 123 Federal Financial Supervisory Authority 42 Federal Gazette 23, 116 Fiscal Year 51 Financial Reporting 79 et seq. Formation AG 13 et seq. KG a. A. 101 GmbH 106 et seq. GmbH & Co. KG 182 Formation Audit 18 Formation Deed 14, 107 Formation Report 17 Generally Accepted Accounting Principles 79 General Meeting 36 General Partnership 6 GmbH & Co. KG 180 et seq. Half-Income System 93 Income Tax 93 et seq.

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Germany Insolvency Proceedings 77/78, 170/171, 184 Interim Certificate 22 International Accounting Standards 80 Intra-group Agreements 34 Legal Personality 2 Limited Partnership 6, 100, 180 Limited Partnership with Share Capital 100 et seq. Limited Shareholder 100 et seq. Liquidation 97 et seq., 177 et seq. Listed Companies 83 Management Board AG 62 et seq. GmbH 154 et seq. Management Report 79 et seq. Merchant 4, 23 Merger 26, 34 Negotiable Instruments Act 41 No-par Share 39 et seq. Non-voting Share with preferred Dividend Right 40 Notary/notarial form 14, 34, 53, 107, 132, 145, 182 Notes 79 et seq. Officers 70, 161 Own Shares AG 43 GmbH 136 Over-indebtedness 78, 171 Partner for Tax Purposes 95 Partnership 5 Partnership Agreement 5, 182 Par-value Share 39 et seq. Permanent Establishment 9 Pre-incorporation Company 15, 108 Privileged Investment 95 Profit and Loss Statement 79 Public Offer 42 Quasi legal Entity 2, 6 Record Keeping 79 Redemption of Shares AG 30 GmbH 123 Registered Office 46, 139 Registered Officers with general signing Powers 70, 161 Registered Shares 39

214

Index Registration AG 19 et seq. GmbH 112 et seq. Representation 66, 158 Shares AG 39 et seq. GmbH 130 et seq. Security Deposit Act 41 Securities Trading Act, Securities Acquisition and Takeover Act 12, 42 Share Certificate AG 22, 39 GmbH 130, 133 Share Register 39 Shareholder AG: Contributions 16 et seq. AG: Meetings/Resolutions 30 et seq., 53 AG: Rights and Obligations 31 et seq. GmbH: Contributions 109 et seq. GmbH: Meetings/Resolutions 127 et seq., 145 GmbH: Rights and Obligations 124 et seq. GmbH: List of Shareholders 130 et seq. Shelf Companies 13, 119 Sole Proprietorship 4 Solidarity Surcharge 93 Split-up 26 Squeeze-out 30, 34 Stock Exchange 12, 38 Subscription of Shares 15 Subscription of Shares 56 Substantial Shareholdings 42 Supervisory Board AG 71 et seq. GmbH 162 et seq. Takeover Bids 42 Taxation AG /GmbH 91 et seq., 175 KG a. A. 103 GmbH & Co. KG 185 Tax Credit 93 Trade Tax on Income 95 Transfer of Shares AG 40 GmbH 132 Transformation 26 et seq., 34 UMAG 38

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1. The System of Commercial Business Forms in Germany

Germany

1

This chapter states the law as it was understood to be in April 2005.

I.

Introduction

1.

The System of Commercial Business Forms in Germany

German law offers a well structured system of business forms for individuals, groups of 1 individuals and entities – with or without their own legal personality – for conducting a business. The most relevant forms are: – sole proprietorship; – unlimited and limited partnerships; – public and private limited liability companies; – branches. All of them can be categorized in a pattern including the following two aspects, 2 which are partially linked with each other: own (separate) legal personality („Rechtspersnlichkeit“) and limitation of liability. The criterion “own (separate) legal personality” means that the business entity is independent and legally separate from the individual(s)/shareholders(s)/partner(s) comprising it and the entity itself is bound by transactions which the management enters into in the entity’s name. Typically limited liability companies are endowed with their own legal personality. In contrast a business carried out by an individual (sole proprietorship/merchant), a non-commercial operation (civil law partnership) or non-independent business forms like the branch cannot claim their own legal personality: the individual(s)/partner(s) carrying out this business are themselves bound by transactions entered into even if the entity has its own name („Firma“) under which it conducts the business. Commercial partnerships (general and limited partnership and variations thereof) can be classified in a third category: they have the status of so-called “quasi legal entities”, which means that they are able to enter into contractual relationships, acquire and possess assets and incur liabilities in their own name and on their own behalf although they do not have their own legal personality. The major consequence of lacking one’s own legal personality becomes obvious with respect to the second criterion, limitation of liability: some types of business forms which do not have their own legal personality (sole proprietorship/merchant, civil law partnership and general (commercial) partnership) have by operation of law an unlimited liability of the individual(s)/partner(s) operating this business, whereas other forms (company/corporation, hybrid forms thereof) have a limitation of liability to the extent that only the assets of the company and not the shareholder(s)/partner(s) themselves are available to satisfy claims of the company’s creditors and thus the liability is limited.1 In between there are of course

1

For the liability concept of a branch cf. sec. I. 1.c) below. A branch itself cannot be liable since it is generally fully integrated into the principal business. Only the principal business which can be any domestic or foreign business form bears any liability, however, the liability of the principal business might be limited due to its business form.

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I. Introduction

some business forms (limited partnership and partnership limited by shares) which have a partial limitation of liability since they are comprised of limited and unlimited partners /shareholders. These business forms, however, can be constructed in a way that even the liability of the general partner(s) is limited, c. f. the GmbH & Co. KG.2 This particular business form has a full limitation of liability as well. 3 As this book focuses on public and private limited companies and variations thereof sole proprietorship, partnerships and branches shall be presented briefly at least in this introduction: a)

Sole Proprietorship („Einzelkaufmann“)

4 The most straightforward business form for an individual to operate a commercial operation is the sole proprietorship: the merchant /sole proprietor is anyone who conducts a business.3 The business (place and name) simply has to be registered with the commercial register,4 although some types of business (e. g. trade, craft) require governmental approval, e. g. pursuant to the Trade, Commerce and Industry Regulation Act („Gewerbeordnung“, „GewO“). The business of the sole proprietor is carried out under a separate business name under which the merchant may file lawsuits and be sued.5 However, he is personally and unlimitedly liable for all liabilities of the business. The sole proprietorship is not a separate tax object, i. e. profits in the business are subject to individual income tax of the person carrying out the business. b)

Partnerships („Personengesellschaften“)

5 If several individuals /entities intend to promote a common (commercial) purpose they can employ the business form “partnership”. The term “partnership” has to be divided in several subcategories. The basic type of a partnership is the civil law partnership, an association without its own legal personality established by a multiparty agreement for the promotion of a common purpose.6 There are in principle no formal requirements for the civil law partnership: the partnership agreement does not have to observe a particular form and the partnership itself does not have to be registered. As the civil law partnership may be established for any lawful purpose, the promotion of a common non-commercial purpose by several persons is sufficient to create such a partnership – even if the parties are not aware of establishing such a legal construct. Partners can be individuals or private entities – with or without own (separate) legal personality – and even public entities. As a consequence of the lack of their own legal personality the partners themselves are obliged by any transactions and liable for all liabilities.

2 3 4 5 6

216

Cf. sec. III.12. § 1 Commercial Code („Handelsgesetzbuch“, „HGB“). § 29 HGB. § 17 HGB. § 705 et seq. of the Civil Code („Brgerliches Gesetzbuch“, „BGB“).

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1. The System of Commercial Business Forms in Germany

Germany

6

Derivatives of the civil law partnership are the commercial partnerships: the general 6 partnership („Offene Handelsgesellschaft“, „OHG“)7 and the limited partnership („Kommanditgesellschaft“, „KG“).8 The general partnership requires at least two partners conducting a business under a joint partnership name, whereby all partners have an unlimited liability. Within the limited partnership – in contrast – the liability of one or more (but not all) partners is limited with respect to the partnership’s creditors to a fixed amount which is their subscribed and registered contribution. OHG and KG are quasi-legal entities and just as the sole proprietorship they have to be registered with the commercial register. Like the civil law partnership the partnership agreement does not have to observe a particular form although a written form is advisable. Further aspects of commercial partnerships (formation, constitution, etc.) are explained in the context of the section referring to the GmbH & Co. KG, a special type of limited partnership.9 Like the sole proprietorship partnerships are – for income tax purposes – not deemed to 7 be separate tax objects (so-called disregarded entities).10 As a consequence of their transparency profits of the partnership will be taxed directly and individually on the level of the partners. c)

Limited Liability Companies/Corporations („Kapitalgesellschaften“)

Limited liability companies – public or private – are the most relevant types of commercial 8 business forms in Germany. They are incorporated11 independent business entities legally separate from their members. They are presented in section II. and III. below. d)

Branch („Zweigniederlassung“)

Instead of setting up a new independent business in the forms explained above, domestic 9 or foreign entrepreneurs conducting an existing business (e. g. sole proprietorship, partnership, a business entity with its own legal personality) can establish a branch. Under German law a branch is a non-independent business form which is fully integrated into the principal business even the latter is abroad.12 As a consequence, the principal business – domestic or foreign – is the owner of all assets of the branch and furthermore the contractual partner towards all business partners and customers of the German 7

8

9

10

11

12

§§ 105 et seq. HGB. The provisions of the BGB concerning the civil law partnership apply subsidiary. §§ 161 et seq. HGB. The provisions concerning the OHG and the civil law partnership apply subsidiary. N. B. The explanations in sec. III. 12 focus on the KG, the principles concerning formation, constitution, transfer of partnership interest, etc., are similar for KG and OHG with the modification that the latter has no limited partner(s). Partnerships are nevertheless separate tax objects for other taxes such as trade tax, turnover tax, etc. Due to the status as incorporated entities limited liability companies are often referred to as “corporations”. Both terms are used alternatively in this chapter. For tax purposes a German branch of a foreign entity is considered to be a permanent establishment („Betriebssttte“).

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branch. I. e. the principal business is obliged by transactions carried out in the branch and also bears full liability. The branch – in contrast – is neither directly obliged by any transaction nor does it bear its own liability, i. e. the branch neither takes over nor prevents any liability of the principal business. The extent of liability of the principal business depends, however, on its own liability regime, i. e. the liability of a foreign limited liability company remains limited for debts, etc., of the German branch. Any branch has to be formally registered with the commercial register of the court in whose jurisdiction the branch is to be located. As a consequence even a foreign entrepreneur is subject to German jurisdiction. The details of the registration procedure are quite complex:13 for branches of foreign business entities the application (which has to be filed by the management of the foreign business entity) has to contain extensive documentation concerning the foreign business entity such as, e. g. proof of existence, registration details, translation of the articles of association.14

2.

Summary of Commercial Business Forms in Germany15 No separate legal personality

Limited Liability

Quasi legal entity

Own legal personality

Limited partnership with a company as the general partner (GmbH & Co. KG)

Limited liability company (GmbH) Corporation (AG) Partnership limited by shares (KG a. A.)

Partially Limited Liability

Branch (Zweigniederlassung) bears no own liability-> subject of liability is the principal business

Limited partnership (KG)

Unlimited Liability

Sole proprietorship (Einzelunternehmen/ Kaufmann) Civil law Partnership (Gesellschaft brgerlichen Rechts)

General partnership (OHG)

II. The Stock Corporation – AG16 1.

Character of the AG

10 The traditional business form used by large enterprises in Germany to operate a business under a regime of limited liability is the AG („Aktiengesellschaft“). Nowadays, the business form “AG” has become more attractive for mid-sized enterprises as well as an 13 14

15 16

218

§ 13 et seq. HGB. N. B. Any amendment of the articles of association of the principal business has to be applied for registration with the commercial register of the branch as well. Categorized under the aspects “own legal personality” and “limitation of liability”. The terms “Stock Corporation”, “Corporation”, „Aktiengesellschaft“, „AG“ and “Public Limited Liability Company” are synonym and thus utilized equally in this chapter.

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1. Character of the AG

Germany 11

amendment of the Stock Corporation Act („Aktiengesetz“, „AktG“),17 the basic statute governing the AG, has introduced in 1994 various modifications for so-called “small corporations” („kleine Aktiengesellschaften“).18 The AG is an enterprise with its own legal personality strictly separate from its mem- 11 bers, who are called “shareholder”. The satisfaction of any of the corporation’s liabilities to creditors is limited to the corporation’s assets, whereas the shareholders themselves are in principle not liable. The AG can only act through its corporate organs: besides the organ shareholder meeting („Hauptversammlung“), the AktG provides for a mandatory two-tier board structure consisting of the management board („Vorstand“) and the supervisory board („Aufsichtsrat“).19 The function and responsibility of each organ is clearly determined. The management is carried out under the sole responsibility of the management board. Neither shareholders (individually or collectively in the shareholder meeting) nor the supervisory board are entitled to instruct the management board or single members thereof with respect to management activities. The supervisory board, however, has a controlling function with respect to the management and the articles of association may make certain significant transactions subject to the approval of the supervisory board. The shareholder meeting finally has a catalogue of matters which the AktG refers to its responsibility,20 but this grants only little and indirect influence on the management of the AG. For the participation of many shareholders simple procedures for joining and leaving 12 the AG have been established. In particular, the AG can choose to be listed at a stock exchange („Brse“)21 to make its shares easily transferable. Having a simple transfer of shares on the one side the functioning of an AG is governed on the other side by a mandatory framework of complex and technical regulations focussing on the shareholder and creditor protection. The necessary procedures may delay the car-

17

18

19

20

21

To some extent other statutes such as the Commercial Code apply (directly or indirectly) as well. For purposes of simplification the various German abbreviations are also used in this chapter. Typically a „kleine AG“ has only one or few shareholders and is not listed at a stock exchange. It enjoys simplifications concerning i. a. articles of association, labour co-determination, shareholder meetings. N. B.: The board structure of a European public limited-liability company (“Societas Europaea”, “SE”) set up in Germany can follow either that of an AG or establish instead only one administrative organ. The articles of association can enlarge this responsibility to some extent. If the legal /commercial basis of the corporation is affected, a measure /transaction may require the consent of the shareholder meeting as a special exception. If the shares of an AG are listed at a stock exchange, the AG is also subject to various securities laws as e. g. the Securities Trading Act („Wertpapierhandelsgesetz“, „WpHG“) and the Securities Acquisition and Takeover Act („Wertpapiererwerbs- und bernahmegesetz“, „Wp G“).

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II. The Stock Corporation – AG

rying out of measures and cause substantial costs for the AG. In Germany of the approximately 16,000 existing AGs almost 1,000 are listed on stock exchanges.

2.

Formation of an AG

13 The formation of an AG is a formal and multistage procedure starting with the formal execution of the formation documents and subscription of the shares, followed by the preparation and audit of the formation report and concluding with the registration in the commercial register.22 a)

Formation Procedure

aa)

Execution of the Formation Documents

14 The initial step to form an AG is the execution of the formation deed23 („Grndungsprotokoll“) and the articles of association („Satzung“) in notarial form.24 One or more shareholders25 (individuals, entities with their own legal personality or even partnerships – regardless of their domicile) may form an AG. The formation deed, which has the quality of a shareholder resolution, documents a) the intention of the founder(s) to establish the corporation with its necessary by-laws, i. e. the articles of association,26 and b) the subscription of the shares of the corporation by the founders. 27 The formation deed must include28 the names of the founders, the amount of the paid-in share capital29 and certain information concerning the shares.30 From a practical viewpoint the for22

23 24

25

26

27 28 29

30

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An alternative to the formation of an AG is the acquisition of a shelf corporation (an existing AG established for this special purpose) or an inactive corporation (which has been in business earlier). This is, however, a measure more often found in the context of the legal form „GmbH“ and therefore shall be described below, cf. sec. III.2.d). The term “memorandum of association” may be used as well. Notarial form pursuant to § 23 sec. 1 AktG means the formal recording („Beurkundung“) of the formation documents by a notary who has the function of an independent office bearer and who provides on his own responsibility objective advice to the parties based on his profound knowledge of the legal sciences. § 2 AktG. Before the „kleine AG“ has been introduced the minimum number of founders was five. The articles of association can be included in the formation deed itself; in practice, however, both documents are formally separated since the formation deed often contains additional agreements between the founders which should not become part of or be connected with the articles of association. § 29 AktG. § 23 sec. 2 AktG. At formation/registration it is not requested that the total amount of the share capital as subsequently registered with the commercial register is paid in, § 36 a sec. 1 AktG. Cf. sec. II.2.a)bb) below. Such information must contain the par value (for par value shares), the number of shares and the issuing price (for no-par shares), and the classes of shares for which each founder has subscribed (if several classes of shares exist).

Frank Dornseifer

2. Formation of an AG

Germany 15

mation deed should also contain the appointment of the initial supervisory board of the corporation and the auditors for the first fiscal year or part thereof since their appointment requires notarial form, too.31 Once the initial supervisory board is appointed it has to appoint the members of the first management board.32 Both the formation deed and the articles of association have to be signed by the founders,33 whereby representation by proxy is permitted if the power of attorney has notarial form or if the signatures under the power of attorney have been authenticated by a notary.34 The execution of the formation documents abroad is generally accepted but should be coordinated in any case with the competent commercial register judge. However, only a German consul (and not a foreign notary or an authority with a similar function) is allowed to carry out the formation abroad.35 According to § 29 AktG the stock corporation shall be “established” upon subscription 15 of all shares by the founders (i. e. in the context of the execution of the formation documents). However, the AG only becomes an entity with its own legal personality upon registration with the commercial register. 36 Prior to registration the corporation is considered to be a specific entity of its own (a so-called “Vor-(Aktien-)Gesellschaft”), which is to some extent similar to a partnership; however, it enjoys particular rights necessary to participate in business and even the AktG and the articles of association apply where suitable.37 bb) Original Shareholder Contributions and their Payment

The share capital of an AG must amount to at least EUR 50,000.38 It is composed of the 16 original contributions („Einlagen“) of each shareholder. The shareholders’ obligation to make contributions to the AG is limited to the issue price of the subscribed shares. 39 The amount of the share capital as registered with the commercial register is a guaranteed minimum fund for creditors.40 With respect to shareholder contributions the 31 32

33 34

35

36 37 38 39

40

§ 30 sec. 1 AktG. § 30 sec. 4 AktG. A specific form is not required for effectiveness, written form is, however, advisable for documentary purposes. § 23 sec. 1, § 28 AktG. § 23 sec. 1 AktG; authenticating also means a formal recording by a German notary, but he verifies only the identity of the signatory signing the document. N. B. Additional formal requirements (Apostille, legalisation) may have to be observed in the course of a notarisation/authentication abroad due to the Hague Convention dated October 5, 1961. There is an ongoing discussion whether a notarisation by foreign notaries observing German standards of notarisation (e. g. in Switzerland or Austria) is equivalent. § 41 sec. 1 AktG. Further consequences, in particular regarding liability, are discussed under sec. II.b). § 7 AktG. N. B. The share capital of a SE in contrast shall not be less than EUR 120,000. § 54 sec. 1 AktG. Ancillary obligations for shareholders are generally not admissible; the articles of association may, however, contain ancillary non-pecuniary obligations but only if the transfer of shares requires the consent of the corporation, § 55 sec. 1 AktG. Under a regime of limited liability not only the contribution itself but also the maintenance of this guaranteed fund is of paramount significance; for the concept of contribution and maintenance of the share capital see also sec. II.8.a) below.

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AktG differentiates between contributions in cash („Bareinlagen“) and contributions in kind („Sacheinlagen“). 41 Examples of the latter are: real estate, buildings, patents, copyrights, know-how. 42 If contributions are to be made in kind, the assets comprising the contribution in kind as well as the value/number of the shares to be issued for such contribution must be stated in the articles of association.43 With respect to its guarantee function it is of paramount importance that the share capital – at least a significant portion thereof – is paid in prior to the moment of filing the application for registration of the AG with the commercial register. Therefore with respect to cash contributions at least one quarter of the lowest issue price44 of the shares and, if shares are issued at a higher price, the extra amount – the premium („Agio“) – has in addition to be paid in.45 If, for example, the share capital amounts to the smallest possible amount of EUR 50,000 at least EUR 12,500 (plus the full premium if such is requested) has to be paid in. Contributions in cash have to be paid in legal tender or by crediting a bank account46 of the AG or of the management board.47 If the corporation is formed by only one person, the registration may only be applied for if either the total share capital is paid up or if said minimum amounts are paid up and the shareholder has in addition provided security for the remaining monetary contribution not paid up.48 Contributions in kind must be fully effected before application for registration with the commercial register and the value of such contribution must equal the lowest issue price, and if shares are issued at a higher price the value must also cover the extra amount.49 cc)

Preparation of a Formation Report and Formation Audit

17 Once the formation documents have been properly executed and the management board has been appointed, the founders personally have to prepare a written report on the details of the formation („Grndungsbericht“). Pursuant to § 32 AktG the formation report has to contain the following mandatory information: a) whether and to what extent members of the management or supervisory board subscribed for shares at the formation and whether and in what manner they procured special rights or received compensation for the formation or its preparation and b) in case of a formation in kind the fundamental facts which give evidence for the appropriateness of the contributions / acquisitions in kind. In addition, the formation report usually refers to essential details 41

42

43 44

45 46

47 48 49

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Contributions in kind are only permitted if the articles of association provide for them; otherwise contributions must be paid in cash. Similar to contributions in kind are acquisitions in kind („Sachbernahmen“), i. e. if the corporation is to acquire assets in the context of the formation, cf. § 27 AktG. § 27 sec. 1 AktG. Pursuant to § 9 sec. 1 AktG shares may not be issued for an amount lower than the par value (the minimum par value is EUR 1) or lower than the portion of the share capital attributable to a no-par share (such portion shall not be less than EUR 1). § 36 sec. 2, § 36a sec. 1 AktG. Banks generally request certified copies of the formation documents for the opening of a business bank account. The bank statement confirming receipt of the shareholder contributions is subsequently required for the registration of the AG with the commercial register. § 54 sec. 3 AktG. § 36 sec. 2 AktG. § 36a sec. 2 AktG.

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2. Formation of an AG

Germany 18

such as: date of execution of the articles of association, share capital, classes of shares, numbers of shares subscribed by founders, amount of paid in contributions, members of the supervisory and management board. The preparation of the formation report is followed by a two-stage formation audit 18 („Grndungsprfung“) which is based on the formation report and the documentation submitted by the founders. The formation audit is a mandatory procedure prior to registration and shall testify – not only for purposes of the commercial register – whether the information provided by the founders, in particular concerning the subscription of shares, shareholder contributions, value of contributions in kind, etc., is complete and correct.50 The first stage is carried out by the members of the management and supervisory board who examine the process of formation,51 the second stage, which is requested only for particular reasons,52 is carried out by so-called formation auditors („Grndungsprfer“), i. e. persons with accounting experience or auditing firms.53 b)

Registration Procedure/Commercial Register

After the steps of the formation procedure described above have been completed the 19 formation of the AG has to be applied for registration with the commercial register („Handelsregister“).54 The application for registration may only be filed after the amount called in for each share has been paid up according to the provisions of the AktG.55 The application for registration with the commercial register has to be signed by all founders and the entire management and supervisory board personally;56 no representation is permitted and the signatures have to be authenticated. In the application they have to assure that the provisions concerning shareholder contributions (in cash and in kind) as well as special requirements for a sole shareholder have been observed and that the contributions have been effected and permanently placed to the free disposal of the management board.57 In addition, the members of the management board have to confirm that there is no hindrance in their person for their appointment and that they have been adequately instructed on their full disclosure duties to the court.58 The application for registration shall further contain formal details of the 50 51 52

53 54

55

56 57 58

The details are outlined in § 34, § 35 AktG. § 33 sec. 1 AktG. Reasons for an extended audit are given if a member of the management or supervisory board is one of the founders, or has subscribed for shares upon formation, or has procured special rights or received compensation during the formation, or if the formation comprises contributions /acquisitions in kind, § 33 sec. 2 AktG. § 33 sec. 2-5 AktG. Until 01/01/2007 all commercial registers shall be transformed to electronic commercial registers so that all information can be submitted and obtained online. Some commercial registers already provide extracts of the register online. § 36 sec. 2 AktG. At this stage the amount paid in may not be utilized, except for taxes and fees related to the formation. § 36 sec. 1 AktG. § 37 sec. 1 AktG. § 37 sec. 2 AktG.

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powers of representation of the members of the management board.59 Finally the members of the management board have to deposit a copy of their signature with the commercial register in authenticated form.60 This is usually done with the signing of the application for registration in front of a notary. 20 The following documents have to be attached to the application:61 – articles of association and notarial formation deed, which includes the subscription of shares by founders; – agreements and documentation concerning a) special rights granted in the course of the formation and b) a formation in kind; – a calculation of the formation expenses; – evidence of the appointment of the management and supervisory board; – formation report and audit report(s) together with the relevant documentation; – appropriate licence documents if the business object or certain provisions of the articles of association require governmental permission. 21 The application for registration will be directed to the commercial register of the local court (“Amtsgericht”) under whose jurisdiction the company’s registered office will fall. The commercial register is the public register for companies and is open to inspection by anybody.62 In general, each local court has a commercial register; however, by now commercial registers have been centralized so that one commercial register in a district is competent for several local courts. The competent judge at the commercial register examines whether the corporation has been duly formed and applied for registration; if this is not the case the court shall refuse the registration.63 The same applies if the formation auditors state or if it becomes evident that the formation report or the formation audit of the management and supervisory board are incorrect, incomplete or do not comply with legal requirements or if the value of contributions /acquisitions in kind is substantially less than the lowest issue price of the shares.64 The judge further contacts the local chamber of industry and commerce („Industrie- und Handelskammer“)65 if there are any objections against the corporation’s name, for example. It

59

60 61 62

63 64 65

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§ 37 sec. 3 AktG (sole or joint power of representation, release of the restrictions of selfcontracting pursuant to § 181 Civil Code); for details of power of representation c. f. sec. II.6.b). § 37 sec. 5 AktG. § 37 sec. 4 AktG. § 9 sec. 1 HGB. Until 01/01/2007 a separate public company register (“Unternehmensregister”) shall be established. The company register will become much more comprehensive as the commercial register and comprise various information which is currently not included in the commercial register, in particular business related information relevant for shareholders, investors and creditors. § 38 sec. 1 AktG. § 38 sec. 2 AktG. N. B.: There are currently discussions whether the chambers of industry and commerce instead of the courts shall take over the function of the commercial register.

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is therefore advisable to contact the competent chamber of industry and commerce in advance and check the availability and admissibility of a name.66 Upon registration67 with the commercial register the AG comes into existence as an 22 entity with its own legal personality.68 This is also the moment shares generally become transferable and share certificates („Aktienurkunden“) and interim certificates („Zwischenscheine“) can be issued.69 The extract of the register entry concerning a corporation shows the following details:70 – name of the corporation; – registered office; – business object; – amount of the share capital; – date of adoption of the articles of association; – names of the members of the management board; – name(s) of registered officers with general signing power („Prokuristen“); – formalities concerning the representation of the members of the management board; – duration of the corporation if this has been limited in the articles of association. The content of the registration in the commercial register is subsequently published by 23 the competent register court in the electronic71 Federal Gazette („Bundesanzeiger“) and at least one newspaper.72 The notice of registration further has to contain information about mandatory provisions in the articles of association, certain details concerning the formation, composition of the management board, shares, founders, initial supervisory board, etc., and it has to state that the documents attached to the application for registration are available for public inspection at the register court.73 Another aspect of the registration of an AG with the commercial register is that the business of the AG is deemed by operation of law to be a commercial business, i. e. the AG itself is regarded as a merchant („Kaufmann“) under the Commercial Code74 and is therefore subject to the obligations and responsibilities established therein. Some of these responsibilities, especially concerning bookkeeping, will be described in detail further below.75 As the registration with the commercial register is the decisive moment for an AG to 24 obtain the status of a legal entity with full capacity and limited liability, business 66

67 68 69 70 71 72 73 74 75

N. B.: Approval by the chamber of industry and commerce does not mean that there are no other infringements of third-party rights, i. e. a corporation which is not registered in this district may have rights in the name which have a higher priority. N. B. Registration of an AG is subject to the prior payment of the registration fee. § 41 sec. 1 AktG. § 41 sec. 4 AktG (interim certificates may be issued until share certificates are available). § 39 AktG. § 25 AktG: the electronic form replaces the ordinary Federal Gazette. § 10 sec. 1 HGB, § 40 AktG. § 40 AktG. § 3 sec. 1 AktG, § 2 HGB. Cf. sec. II.9.

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transactions prior to the registration bear a certain risk for any party involved. To prevent such transactions § 41 sec. 1 AktG stipulates that anyone acting in the name of a corporation prior to registration shall be personally liable; several persons acting for a corporation are jointly liable. Therefore the shortfall between the stated amount of shareholder contributions in total and the real amount as reduced in advance by transactions, has to be equalized toward the corporation by those acting in the name of the corporation (e. g. founders and members of the management board), so-called Differenz- oder Unterbilanzhaftung. One important aspect to consider in this context is that this obligation is not limited to the total amount of the stated share capital, i. e. the persons acting for the corporation have an unlimited personal liability.76 Upon registration, however, rights and obligation taken over and contracts entered into in the preregistration period are transferred to the AG. Simultaneously the personal liability of persons acting for the corporation expires and is taken over by the AG. c)

Governmental Permission

24 An AG can be established for any legitimate business object, which does not necessarily mean a commercial purpose, i. e. even non-profit-making purposes are permitted. The formation itself does not require a governmental permit. The carrying out of some business objects, however, requires a governmental permit, e. g. banking and insurance business, handicraft, financial services / brokers, hospitals, restaurants, bars, hotels, transportation of goods and passengers. If a permit is required, this permit must be attached to the application for registration with the commercial register.77 d)

Cost/Duration

25 Notary and court fees including registration fees and costs for the publication in the Federal Gazette for a normal AG with a share capital of EUR 50,000, which is only contributed in cash, amount to approximately EUR 2,000.78 Preparation of the relevant documents and subsequent notarisation can be completed short-term if all information regarding the corporation is available and has been verified. The registration process after filing the application may vary from a few weeks (if the formation is straight forward, e. g. only shareholder contributions in cash, all documents have been properly prepared and there is prior coordination of the formation with the competent commercial register) up to some months if the commercial register has to perform an extensive examination (examination of the formation audit, etc.). e)

Establishment of an AG by Transformation

26 A common alternative procedure for a stock corporation to come to existence is the transformation, i. e. the change of legal, business and capital structures, of one or more 76

77 78

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Such liability can only be avoided individually by explicit agreement with the contracting (third) parties. § 37 sec. 4 no. 5 AktG. N. B. Fees are of course frequently higher, depending on the structure of the AG, types of shareholder contributions, necessary audits, etc.

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existing business entities. Several means for a transformation are provided for by the Transformation Act („Umwandlungsgesetz“, „UmwG“):79 – change of legal form („Formwechsel“), e. g. conversion of a partnership or limited liability company into an AG under retention of its legal personality80 – merger („Verschmelzung“) of existing enterprises into one AG, whereby the new entity succeeds in the rights and obligations of the predecessor entities81 – division/split-up („Spaltung“) of an existing enterprise into two or more separate entities.82 As all of these measures have fundamental impact on the entity/entities involved they 27 require the approval of the shareholders by notarial shareholder resolution. Shareholders who object to a transformation have several means to secure their legal position as e. g. legal actions against the effectiveness of the resolution, request to improve the exchange ratio, cash buy-out.83 If two or more entities are involved (i. e. in case of merger and division) the Transformation Act provides for the conclusion/setting up of a mandatory transformation agreement /plan in notarial form, which is then the underlying legal transaction for the transformation. In general the transformation agreement / plan has to be audited. For all types of transformation the representatives have to prepare in addition a written transformation report explaining the transformation and its consequences to the shareholders. To some extent employee rights constitute further restrictions as the transformation agreement /plan has to be submitted to the works council prior to the adoption of the shareholder resolution approving the transformation. Any type of transformation becomes effective only upon registration with the commercial register. f)

Requested Information on Business Letters/Stationery

Business letters are in general all types of correspondence which are directed to a 28 specific addressee including order forms but excluding notifications and reports issued in connection with existing business relations and excluding those cases where it is customary to use printed forms on which only the particular details necessary for each case have to be inserted. Business letters must contain the following information:84 – legal form of the company, i. e. AG; – registered office; – competent register court and register number; – surname and at least one first name of all members of the management board and the chairman has to be described as such; – surname and at least one first name of the chairman of the supervisory board. 79

80 81 82 83 84

The details of each specific transformation process provided by the Transformation Act are quite complex and therefore only some general aspects concerning transformations shall be outlined in this chapter. §§ 190-304 UmwG. §§ 2-122 UmwG. §§ 123-173 UmwG. Cf. §§ 14, 15, 29, 30 UmwG. § 80 AktG.

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29 Information about the share capital can be included in business letters: However, if this is the case the total amount as well as the aggregate amount of outstanding contributions – should the issue price for shares not have been paid in full – have to be stated.

3.

The Shareholder/the Shareholder Meeting

30 Two alternatives have to be distinguished for becoming a shareholder of an AG: initial membership by subscribing for a shareholding at the formation or in the course of a capital increase and derived membership by acquisition or inheritance of a shareholding. As a consequence of the latter the membership of the transferring shareholder is terminated, other means to terminate membership in an AG are the exclusion of defaulting shareholders („Kaduzierung“) if they fail to pay the original contribution,85 redemption/amortization of (fully paid in) shares („Einziehung“) in the course of a reduction of the share capital86 and the so-called squeeze-out, the compulsory transfer of shares of minority shareholders to the principal shareholder in return for a compensation in cash.87 A withdrawal is not permitted either for the shareholder or for the AG since this could lead to an unlawful reduction of the share capital. a)

Rights and Obligations of a Shareholder

31 The general rule that applies in an AG is: shareholders shall be treated equally under equivalent circumstances. 88 A differentiation based on objective reasons is, however, admissible. Therefore e. g. different classes of shares may be issued. The basis for the application of the principle of equal treatment is not the number of shareholders but the respective amount of the shareholding. The rights and obligations of shareholders are laid down in the AktG, the articles of association and shareholder resolutions which are adopted in accordance with the articles of association. In addition the recently introduced German Corporate Governance Codex89 contains a clarification of some of the rights of the shareholders. In general the rights and obligations of shareholders can be categorized as follows: 85 86

87

88 89

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§ 64 AktG. § 237 AktG. N. B.: Such redemption must be permitted in the articles of association. In addition excluded shareholders are entitled to receive a termination payment. § 327 a et seq. AktG: a shareholder holding 95% of the share capital can request from the shareholder meeting to resolve in a formal resolution on the transfer of the shares of minority shareholders; the cash compensation to be paid in return is determined by the principle shareholder himself; however, its adequacy has to be examined by auditors and is furthermore subject to judicial review. The transfer of shares becomes effective upon registration of the shareholder resolution with the commercial register. § 53 a AktG. Pursuant to § 161 AktG the German Corporate Governance Codex is a recommendation for listed corporations: Once a year the management and supervisory board have to state whether the corporation complies with this Codex and if not, which recommendations have not been complied with (“comply or explain” rule). The codex is published under www.corporategovernance-code.de.

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3. The Shareholder/the Shareholder Meeting

Germany 32

Rights: – administration rights (right to participate and bring in motions in shareholder meetings, voting rights, information rights, right to challenge the validity of shareholder resolutions, right to appoint special auditors); – property rights (dividend right, right to the proceeds of liquidation); Obligations: – allegiance/loyalty;90 – duty to pay in the original contribution; – duty to provide ancillary non-pecuniary obligations (only if stipulated in the articles of association and if the transfer of shares requires the consent of the corporation). In general, rights and obligations are linked to the ownership of the share in the 32 corporation (e. g. dividend right, obligation to make the shareholder contribution); however, some are linked to the person of the shareholder (e. g. obligation to provide specific services to the corporation). The former can be described as statutory rights and obligations which also affect third parties, whereas the latter are in principle “contractual” obligations which the contracting parties intend to have only inter partes effect and are therefore not conclusively linked to the shareholding, i. e. when a share is transferred these rights and obligations are not transferred automatically to the transferee, but only upon explicit stipulation in the articles of association or by special agreement. As shareholder rights and obligations may derive from various sources (AktG, articles of 33 association and shareholder resolutions) the AktG stipulates a clear hierarchy:91 a) provisions of the articles of association may only deviate from the AktG if explicitly permitted by it and b) supplementary provisions can be included in the articles of association only if the AktG governs such matters not conclusively. In addition the principle of equal treatment of the shareholders has to be obeyed and discrimination of minorities is not permitted. In consequence the AktG considerably restricts the framework of shareholder rights and obligations. The shareholder meeting may, however, accept with a qualified majority and the consent of the shareholders who are adversely affected that some rights and obligations apply for particular shareholders only.92 Examples for such preferential rights are: increased dividend to certain shareholders compared to the proportion of their shareholding in the share capital, increased voting rights compared to the proportion of the shareholding, nomination right to appoint single members of the advisory board. An example for special obligations is the obligation to provide special services to the corporation.

90

91 92

This obligation generally has little relevance; in certain cases majority shareholders may, however, have to take the interest of minority shareholders into account. § 23 sec. 5 AktG. Once created it might become difficult to revoke these rights or obligations so that such measures should be considered carefully.

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b)

Shareholder Meetings/Shareholder Resolutions

II. The Stock Corporation – AG

34 As outlined above there is no direct influence of the shareholders on the management board and the management board is not bound to instructions of another body of the corporation.93 Nevertheless the shareholder meeting has a significant role in the constitution of a corporation since it is a) the forum in which shareholders exercise their rights94 and b) a number of recurring decisions and structural measures are exclusively dedicated to the shareholder meeting so that neither management nor supervisory board can claim responsibility. Such decisions /measures are, among other things: – appointment and removal of members of the supervisory board, unless certain members are nominated otherwise or elected pursuant to labour co-determination provisions;95 – appropriation of retained earnings96 and approval of annual financial statements;97 – granting of discharge for the members of the management and supervisory board and appointment of auditors;98 – appointment of special auditors for matters relating to the formation or the management („Sonderprfung“) and assertion of damage claims against management and supervisory board members;99 – amendment of the articles of association including measures to increase or decrease the share capital;100 – approval of certain types of control agreements or profit transfer agreements, so-called intra-group agreements („Unternehmensvertrge“);101 – consent to mergers,102 transformations103 and similar measures; – implementation of a squeeze-out.104 35 The articles of association can dedicate additional matters to the shareholder meeting. Management matters are, however, exempted and shareholders may only resolve on those if the management board makes an explicit request.105 On the other hand the

93

94 95 96

97 98 99 100 101 102 103 104 105

230

The management board can, however, request that the shareholder meeting resolves on management matters, § 119 sec. 2 AktG. Such resolutions are of course binding for the management board. § 118 sec. 1 AktG. § 119 sec. 1 AktG. § 119 sec. 1 AktG, whereby several restrictions apply for the appropriation of the annual net income, § 58, § 150 AktG. § 173 sec. 1 AktG. § 119 sec. 1 AktG. §§ 119 sec. 1 no. 7, 142 sec. 1, 147 sec. 1 AktG. § 119 sec. 1 AktG. § 293 AktG. § 13 UmwG. § 193 UmwG. § 327a AktG. § 119 sec. 2 AktG.

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3. The Shareholder/the Shareholder Meeting

Germany 36

management board may even be obliged to submit certain matters to the shareholder meeting if those are structural matters of outstanding relevance for the corporation,106 e. g. the sale of the most valuable assets of the corporation. The management board convenes shareholder meetings.107 The place of the shareholder 36 meeting must be within Germany.108 Notice of the shareholder meeting shall be published in the designated (news)papers109 of the corporation stating the corporation’s name and registered office, time and place of the meeting and conditions governing attendance and exercising of voting rights in the meeting110 as well as the agenda.111 Shareholders may waive these formalities if all shareholders are present or represented in the meeting.112 In addition to the notice calling a shareholder meeting the management board has to give credit institutions and shareholders’ associations which exercised voting rights on behalf of shareholders at the last meeting or which requested such information, information regarding the notice of the meeting, the agenda, motions and nominations proposed by shareholders including supplementary details.113 Once a year – within the first eight months of the fiscal year – the so-called annual general meeting („ordentliche Hauptversammlung“) has to be convened by the management board.114 As this shareholder meeting is connected with drawing up the annual financial statements,115 the agenda of the ordinary shareholder meeting generally contains the following (mandatory) topics: – presentation/approval of the annual financial statements and the annual report; – appropriation of profits; – granting of discharge to the members of the management and supervisory board; – appointment of auditors.116 106 107 108

109

110

111

112 113

114 115

116

This group of matters has been established (and recently stated more precisely) by case law. § 121 sec. 2 AktG. Shareholder meetings abroad are generally disapproved, however, it might be argued that they are admissible if the articles of association explicitly provide for, but only if all shareholders are present. If the shareholders are known to the stock corporation by name (typically in small AGs), the shareholder meeting may be convened by registered letter, § 121 sec. 4 AktG. § 121 sec. 3 AktG. The notice period is one month prior to the date of the meeting, § 123 sec. 1 AktG. § 124 AktG. For each item on the agenda management board and/or supervisory board shall publish proposals for the adoption of respective resolutions, § 124 sec. 3 AktG. Of course, the shareholders themselves may propose counter-motions for the shareholder meeting, cf. § 126 AktG. § 121 sec. 6 AktG. § 125 AktG: shareholders and members of the supervisory board may receive this information as well. § 175 sec. 1 AktG. It shall be called in promptly after the annual financial statements have been drawn up and reviewed by the supervisory board, § 175 sec. AktG. Cf. sec. II. 8. below as well. Further topics can be added to the agenda by discretion of the management board or by request of shareholders having a total shareholding of one-twentieth of the share capital or an amount of Euro 500,000, § 122 sec. 2 AktG.

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37 Additional shareholder meetings have to be convened, e. g. if shareholders holding a total of at least one-twentieth of the entire share capital so request,117 or if half of the share capital is consumed by loss.118 The chairmanship in shareholder meetings is generally given to the chairman of the supervisory board by the articles of association.119 Otherwise the shareholder meeting itself must adopt a procedural resolution determining the chairman.120 38 In principle the shareholder meeting decides by a majority of the votes cast unless the law or the articles of association provide for a greater majority or further requirements.121 The amendment of the articles of association, however, requires a majority of three quarters of the votes cast.122 Voting rights shall be exercised in proportion to the par value, or if no-par shares are issued in proportion to their number.123 In the shareholder meeting shareholders have a fairly broad right to information,124 which shall enable them to receive the necessary information required for voting on the various topics on the agenda. The general formal requirement for shareholder resolutions is that they have to be recorded in minutes observing a notarial form.125 The minutes have to state the place and date of the meeting, the notary’s name, the form and result of the voting as well as the assessment of the chairman related to the adoption of each resolution.126 As an exemption for certain corporations not listed on a stock exchange (typically „kleine Aktiengesellschaften“) the notarial form is dispensable for resolutions which do not require a vote by a majority of three-quarters or larger; in such a case minutes signed by the chairman of the supervisory board suffice.127 Shareholders cannot pass resolutions outside a meeting.128 During each shareholder meeting a list has to be drawn up stating the shareholders present /represented, representatives of shareholders, 117

118 119

120

121 122

123 124 125 126

127

128

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§ 122 AktG. Such minority shareholders may also request that certain topics are reserved for a decision by the shareholder meeting. If the management board does not comply with such requests, a court may entitle the shareholders themselves to convene the shareholder meeting. § 92 sec. 1 AktG. The articles of association usually contain a set of provisions concerning the rules of procedure for shareholder meetings. Pursuant to § 129 sec. 1 AktG the shareholder meeting has the competence to adopt its own rules of procedure for the purpose of preparing and executing shareholder meetings. § 133 sec. 1 AktG. § 179 sec. 2 AktG. This is a compulsory provision serving the protection of minority shareholders. In consequence the AktG does not permit smaller majorities in the articles of association. § 134 sec. 1 AktG. § 131 AktG. § 130 sec. 1 AktG, i. e. a notary has to attend the meeting to carry out the formal recording. § 130 sec. 2 AktG: The form and result of the voting have to be stated in a fair amount of detail in the minutes, i. e. votes for and against the motion, abstaining shareholders, whether the motion has failed or been adopted, etc. § 130 sec. 2 AktG. Resolutions which require a three-quarter or larger majority, i. e. fundamental resolutions („Grundlagenbeschlsse“) of course have to observe the notarial form. New means to participate in a meeting, e. g. internet voting, have been introduced recently but the forum of the shareholder meeting nevertheless has to take place.

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4. The AG Share

Germany 39

the amount (for par value shares), the number (for no-par shares) and the class of shares represented by each of them.129 This list shall be available for inspection by all participants prior to the first ballot.130 Immediately after the meeting the management board has to submit to the commercial register an officially certified copy of the minutes or – if the exemption for not listed corporations applies – minutes signed by the chairman of the supervisory board including any exhibits.131 Some provisions of the AktG concerning shareholder meetings shall be modified by the “Act on Integrity of Corporations and Modernisation of Rights for Actions to set aside” („Gesetz zur Unternehmensintegritt und Modernisierung des Anfechtungsrechts“, „UMAG“).132 The main amendments concern the simplified attendance of the shareholder meeting,133 the possibility for the chairman to set time-limits for queries and speeches of shareholders and to refer “frequently asked questions” to e. g. the homepage of the corporation.134

4.

The AG Share

As stated above, in the course of the formation shareholders subscribe for shares („Ak- 39 tien“) in return for their original contributions. The shareholder’s right to have share certificates issued may be restricted or excluded by the articles of association.135 The form of shares consequently issued may either be par value shares („Nennbetragsaktien“) or no-par shares („Stckaktien“).136 The par value is a fixed amount which represents a portion of the share capital. Par value shares must have a minimum par value of EUR 1; shares with a higher value must be a multiple of EUR 1.137 No-par shares also participate in the share capital, but as they have no par value the total number of shares is thus decisive for the portion of each shareholder in the share capital. The portion of the share capital attributable to a no-par share may not be less than EUR 1.138 Shares may not be divided.139 Apart from the quota of the share capital the AG share also of course represents the membership of a shareholder and all rights and obligations pertaining thereto. Frequently the membership in a corporation is manifested in a material share certificate.140 Share certificates may be issued as bearer shares („Inhaber-

129 130 131 132 133 134 135 136

137 138 139 140

§ 129 sec. 1 and 2 AktG. § 129 sec. 4 AktG. § 130 sec. 5 AktG. N. B. The Act shall enter into force on November 1, 2005, but has not yet been adopted. § 123 sec. 2-4 AktG. § 131 sec. 3 no. 7-9 and sec. 6 AktG. § 10 sec. 5 AktG. § 8 sec. 1 AktG. An AG can only have one type of shares. A combination is not possible. However, concerning par-value shares the par-value does not have to be equal for all shares. § 8 sec. 2 AktG. § 8 sec. 3 AktG. § 8 sec. 5 AktG. The articles of association may, however, exclude or restrict a shareholder’s right to have share certificates issued.

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aktien“) or registered shares („Namensaktien“);141 the registered form is mandatory if the shares are issued prior to the payment of the issue price.142 A corporation has to keep a share register for registered shares, in which the name, date of birth and address of the shareholder as well as the number or certificate number and for par value shares, the amount of the shares, have to be registered.143 The share register serves the purpose of legitimating a shareholder, but only towards the company,144 i. e. the exercise of rights and obligations in relation to the corporation depends on the registration in the share register, whereas e. g. the validity of a transfer of shares to a third party does not depend on registration/deregistration in the stock register. a)

Classes of Shares

40 Apart from the distinction between par value and no-par shares – relating to the form of shares – and between bearer and registered shares – relating to the type of share certificate – the AktG establishes a further distinction which is to some extent a restriction of the principle of equal treatment of shareholders mentioned above: pursuant to § 11 AktG a corporation may issue different classes of shares which may confer different rights on the shareholders, in particular concerning the distribution of profits of the corporation.145 The most common class thereof are non-voting shares with preferred dividend rights („Vorzugsaktien“).146 Shareholders acquiring such shares are excluded from the right to vote, but receive in return of the net retained profits147 their preferred dividend prior to other (common) shareholders. The amount /calculation of the dividend is determined in the articles of association and has to follow objective criteria. In addition such preferred shareholders are entitled to back-payments if the dividend has not been paid in the preceding year.148 b)

Transfer of Shares /obligations concerning substantial shareholdings

41 The requirements concerning the transfer of AG shares depend on the type of share certificate issued rather than the form or class of shares. They are set out in different acts like the negotiable instruments act („Wechselgesetz“, „WG“), the security deposit act („Depotgesetz“, „DepotG“) and the Civil Code, whereas the AktG itself contains only a few supplementary provisions, namely with regard to the transfer of registered shares.149 As mentioned above the registration in the share register of the corporation 141

142 143 144 145

146

147 148 149

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§ 10 sec. 1 AktG. These types of certificates may be issued for both forms of par value and nopar shares. § 10 sec. 2 AktG. § 67 sec. 1 AktG. § 67 sec. 2 AktG. If different classes are issued, the articles must specify those as well as the number of shares in each class, § 23 sec. 2 no. 4 AktG. § 12 sec. 1, § 139 et seq. AktG. The amount of such shares issued may not exceed one half of the share capital. Pursuant to § 57 sec. 3 AktG only these may be distributed. Otherwise they retain voting rights until the arrears have been paid, § 140 sec. 2 AktG. § 68 AktG, which also refers to general provisions of the negotiable instruments act.

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Germany 42

is not a precondition for the validity of a transfer but for legitimisation vis--vis the corporation, e. g. to exercise rights in shareholder meetings. Registered shares are qualified as a statutory order paper („Orderpapier“) and can therefore be transferred by endorsement („Indossament“)150 and delivery („ bertragung“) of the share certificate. Alternatively the right attested by the share certificate (i. e. the membership) can itself be transferred by a simple transfer agreement („Abtretung“) pursuant to the general provisions of the Civil Code.151 In this case ownership of the share certificate follows the prior transfer of membership.152 The latter type of transfer, i. e. by a simple transfer agreement, also applies to bearer shares, but the transfer is permitted here without physical delivery of the share certificate.153 Irrespective of the type of shares and the type of transfer no particular form has to be observed in the course of a transfer, i. e. notarisation or the like is not required; written form is, however, advisable for documentary purposes. Generally the corporation cannot restrict the transfer of shares. The articles of association may, however, stipulate for registered shares that the transfer is subject to the approval of the corporation.154 The cost for transferring shares is in principal only the fees invoiced by financial institutions, i. e. commission fees, etc. If a transfer of shares has substantial influence on the percentage of voting rights in 42 listed companies additional securities laws have to be observed. An investor /shareholder, whose shareholding in a listed company reaches, exceeds or falls below an aggregate shareholding of 5, 10, 25, 50 or 75 per cent of the voting rights has to notify the company and the Federal Financial Supervisory Authority („Bundesanstalt fr Finanzdienstleistungsaufsicht“, „BaFin“).155 The company itself has to disclose this information in a supra-regional official stock exchange gazette.156 Additional means for shareholder protection have been established in case of takeover bids. An offeror who aims to acquire – directly or indirectly – control of a listed company, i. e. at least 30 per cent of the voting rights,157 shall offer the shareholders of the target company a fair consideration.158 Similarly, if whosoever – directly or indirectly – ac150 151

152

153

154 155

156 157 158

§ 68 sec. 1 AktG. Such a civil law agreement has two mandatory components, the contractual obligation itself and the subsequent transfer of title. The subsequent delivery of the share certificate is necessary for the completion of the transaction. Additional means for the transfer are stipulated in the security deposit act which shall not, however, be discussed here. § 68 sec. 2 AktG. Such restricted transferability is called „Vinkulierung“. § 21 WpHG (Securities Trading Act). Voting rights of group companies as well as voting rights of third parties which coordinate their behaviour with the notifying party (acting in concert) are attributed to the notifying party, § 22 WpHG. § 25 WpHG. § 29 Wp G (Securities Acquisition and Takeover Act). § 31 Wp G.In connection with the offer the offeror has to notify firstly the management of the stock exchange and BaFin of its decision and publish it secondly in at least one supraregional official stock exchange gazette and via an electronic information dissemination system and then notify the management board of the target company.

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quires control of a target company he is obliged to make a public offer to all other shareholders.159 This obligation does not apply if control is acquired as a result of a takeover bid. c)

Own Shares

43 Pursuant to § 57 sec. 1 AktG contributions may not be repaid to shareholders.160 In consequence the acquisition of its own shares by a corporation, i. e. a repayment of cash to shareholders, is not admissible. As an exemption to this rule, however, § 71 AktG permits in certain situations the acquisition of own shares, among other things, a) if the acquisition is necessary to avoid a serious and imminent damage to the corporation, b) if the shares are offered to (former) employees of the corporation or an affiliate of the corporation („Belegschaftsaktien“), c) if the shares are acquired to compensate shareholders in the course of transformation measures, or d) as an investment of net assets on the basis of a general authorization by the shareholder meeting.161 In most of these cases the acquisition of own shares is subject to the condition that the corporation is able to create a reserve for treasury shares pursuant to § 272 sec. 4 HGB and the sum of shares to be acquired including other shares already acquired may not exceed ten percent of the share capital of the corporation. For other cases the acquisition is only permitted if the issue price for the shares has been fully paid up. Contrary to a redemption of shares, the shares acquired by the corporation continue to exist and they can be transferred (or otherwise disposed of) by the corporation, although administration and property rights pertaining to own shares are dormant.162

5.

The Articles of Association

44 The constitution of an AG is governed by a hierarchic system of regulations, in which the provisions of the AktG dominate the by-laws of an AG, i. e. the articles of association („Satzung“/„Gesellschaftsvertrag“). Many provisions of the AktG are compulsory and therefore cannot be set aside by the articles of association.163 In addition the AktG determines in § 23 sec. 3 the mandatory content of the articles of association. a)

Mandatory Content

aa)

Name of the Corporation and its Registered Office

45 The choice of the corporation’s name („Firma“) is quite liberal and even fantasy names are admitted. The addendum „Aktiengesellschaft“ or a common abbreviation like “AG” 159

160 161

162 163

236

§ 35 Wp G. The fact of acquiring control has to be published without undue delay (within 7 days) and within 4 weeks after publication the offer document has to be submitted to BaFin and published. This rule derives from the principle of contribution and maintenance of the share capital. This authorization may not exceed a period of 18 months; the purchase may not exceed 10 % of the share capital and the purpose may not be trading in shares. § 71 b AktG. § 23 sec. 5 AktG.

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5. The Articles of Association

Germany 46

is mandatory in order to guarantee transparency in business regarding the particular corporate form.164 Restrictions might arise through other laws with respect to the clarification and distinctiveness of the name as well as registered trademarks or unfair competition. The registered office („Sitz“) as designated in the articles of association is the place 46 where the corporation runs the business; alternatively the corporate office or the place where the management occurs can be determined in the articles of association as the registered office.165 The registered office may not be outside Germany, neither at formation nor by changing the registered office.166 bb) Business Object

An AG can be established for any legitimate business object („Unternehmensgegen- 47 stand“). The description of such object must be reasonably precise and not too vague. A too narrow business object has only a minor impact on the business itself since German law does not apply the “ultra vires doctrine”. The type of products manufactured/traded must be specified for corporations engaged in industry and trade. cc)

Amount of Share Capital and its Dissection, Types of Share Certificates

Besides the amount of the share capital167 the articles of association have to contain 48 information about a) the form of the shares issued (par value shares or no-par shares) and related information,168 b) if different classes of shares exist, the classes and the number of shares in each class and c) the types of shares issued (registered or bearer shares). dd) Information Concerning the Management Board

The articles of association further have to refer to the number of members of the 49 management board or the rules according to which they are determined. ee)

Information Concerning Public Notices

Finally the articles of association must contain provisions concerning the form of public 50 notices issued by the corporation.

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§ 4 AktG. § 5 AktG. Pursuant to corporate income tax law a cross-border change of the registered office is equivalent to a liquidation of the corporation which triggers taxation of hidden reserves, etc. The legality of the corresponding provision is very questionable with respect to EU law and recent case law ( berseering, Inspire Art). The minimum amount of the share capital is EUR 50,000, § 7 AktG. If par value shares are issued the articles of association have to state the par value and the number of shares for each par value, if no-par shares are issued they have to state their total number.

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b)

Additional Provisions of the Articles of Association

II. The Stock Corporation – AG

51 Beyond the aforementioned mandatory provisions the articles of association may contain deviating provisions only if the AktG expressly permits this; supplementary provisions are permitted only if the provisions of the AktG are not conclusive in this matter.169 Observing these restrictions the following is typically included in the articles of association: – fiscal / business year, – rights and obligations of members of the management board, – rights and obligations of members of the supervisory board, – financial reporting /audit requirements, – competence of the shareholder meeting (in addition to the mandatory provisions of the AktG), – approval requirements for the transfer of shares, – distribution of profits, etc. c)

Amendment of the Articles of Association

52 With respect to the significance of the articles of association their amendment has to follow quite a formal procedure: aa)

Formally Recorded Shareholder Resolutions

53 As the initial articles of association have been adopted by the (founding) shareholders in a shareholder meeting, any amendment of the articles of association is effected in this forum too.170 Shareholder resolutions have to be formally recorded by a notary and require a majority of three quarters of the votes cast171 whereas the articles of association can even impose additional requirements,172 e. g. a greater (but not a smaller) majority or unanimity or the consent of specific shareholders. The imposing of additional requirements, however, is subject to some restrictions: an increase of obligations assumed by the shareholders under the articles of association requires the approval of all the shareholders affected; granting and revocation of preferential rights to some shareholders requires the consent of those shareholders who are adversely affected, etc. The mandatory notarisation of amendments of the articles of association shall document the act of will of the shareholders and serves to draw their attention to the significance as well the consequences of the amendment. Similar to the formation the notary in his capacity as an independent office bearer shall review the legality of the intended amendment. bb) Registration with the Commercial Register

54 Any amendment of the articles of association has to be applied for registration with the commercial register,173 i. e. the fact that the articles of association have been amended 169 170 171

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§ 23 sec. 5 AktG. § 179 sec. 1 AKtG. § 179 sec. 2 AktG. Due to this specific majority requirement notarial form is even requested for non-listed corporations, § 130 sec. 1 AktG. § 179 sec. 2 AktG. § 181 sec. 1 AktG.

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must be registered with the commercial register. In addition, amendments concerning details shown in the extract of the commercial register require a rectification of the respective entry in the commercial register174 and they have to be published in the official papers.175 The application which has to be filed by the management board176 shall contain the complete text of the amended articles of association together with the affidavit of the certifying notary that the amended provisions correspond to the resolution amending the articles of association and that the unchanged provisions correspond to the complete text of the articles of association as last submitted to the commercial register.177 The application has to be signed by members of the management board in the required number (depending on the power of representation) and their signatures have to be authenticated by a notary. Representation by proxies178 is permitted only if the application does not contain declarations for the correctness of which the applicant is personally responsible.179 Apart from the purpose of maintaining the correctness of the commercial register the registration is a precondition for the amendment becoming effective.180 Of course the shareholders are bound among themselves by the shareholder resolution upon its adoption unless they agree that they are bound only upon its registration. d)

Capital Increase/Decrease

An increase and decrease of the share capital are special types of an amendment of the 55 articles of association and consequently the procedure described above (notarial shareholder resolution with a majority of three quarters, application for and registration with the commercial register, publication, etc.) has to be observed. The most common capital measures are:181 ordinary share capital increase, conditional capital increase, authorized capital, increase of share capital from corporation reserves, ordinary share capital decrease, and simplified decrease of the share capital.

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§ 181 sec. 2 AktG; replaced entries in the register are underlined; new entries are placed below. § 181 sec. 2 AktG, § 10 HGB; publication is only declaratory, but can be asserted against a third party. If an amendment of the articles of association includes a capital increase or decrease, the application in addition has to be filed by the chairman of the advisory board, § 184 sec. 1, § 195 sec. 1, § 223 AktG. § 181 sec. 1 AktG; the application is again subject to a (limited) review by the competent register court. Representation by proxy requires a power of attorney observing notarial form (authentication) pursuant to § 12 HGB. Such responsibilities are listed e. g. in § 46, § 48 and § 399 AktG. § 181 sec. 3 AktG. Cf. as well § 189, § 211, § 224 AktG for capital increase /decrease. The AktG contains further capital measures which have less relevance and shall therefore not be considered here. The term “ordinary” is used in the following to refer to the standard capital increase /decrease.

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aa)

Capital Increase

II. The Stock Corporation – AG

56 The ordinary share capital increase is carried out through additional contributions in cash or kind from existing shareholders182 or third parties intending to become shareholders.183 Such shareholder contributions for new shares are subject to the same restrictions as on formation, i. e. minimum payment requirements for cash contributions, evaluation and proof of value of assets including an audit certificate if contributions in kind are to be made.184 In a first step the shareholders adopt a shareholder resolution increasing the share capital185 and subsequently the management board and the chairman of the supervisory board apply for the resolution amending the articles of association to be registered with the commercial register.186 In a second step the corporation offers to existing or new shareholders the subscription of new shares187 by a written declaration in which the shareholders undertake to pay the issue price and fulfil any ancillary obligations. This subscription certificate („Zeichnungsschein“) has to specify, among other things: the number of shares to be subscribed, the date of the shareholder resolution, the issue price of the shares, the amount of the payment and any ancillary obligations, the date on which the subscription ceases to be binding (i. e. if the completion of the capital increase has not been registered until this date), in the event of par value shares the par value, if more than one class of shares is being issued the classes of shares.188 After all shares have been subscribed to, the management board and the chairman of the supervisory board also have to apply for the registration with the commercial register the completion of the capital increase.189 The application has to be accompanied by duplicates of the subscription certificates, a list of the subscribers signed by the management board stating the number of shares allocated to each subscriber and payments made therefore, in the event of contributions in kind any agree-

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184

185 186

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Pursuant to § 186 AktG each shareholder is entitled to receive – upon request – new shares in proportion to its existing shareholding; however, this subscription right („Bezugsrecht“) may be excluded in full or in part under certain circumstances. Frequently the capital increase is carried out with the assistance of credit institutions which first subscribe to the entire new shares and are subsequently obliged to offer such shares to other shareholders for subscription under the same conditions that would apply if the corporation itself issued the shares. § 188 sec. 2, § 36 sec. 2, § 36 a, § 37 sec. 1, § 183 AktG. Frequently shareholders try to circumvent the formalities of a contribution in kind and therefore choose a contribution in cash with the company subsequently acquiring goods from the contributor so that the capital increase is in fact a capital increase in kind (so-called „verdeckte Sacheinlage“). Such a transaction is void and the contribution in cash has to be paid again. § 182 AktG. § 184 AktG. In the event of contributions in kind further formalities, including an audit of the contributed assets, have to be observed, § 183 AktG. Only issuance of new shares – and not the increase of existing shares – is permitted, § 182 sec. 1 AktG. § 185 AktG. § 188 AktG. This application can be carried out together with the initial application pursuant to § 184 AktG concerning the capital increase. If not all shares are subscribed to, the capital increase has failed and the share capital remains unchanged.

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ments related thereto, a calculation of the expenses which incur in the context of the issuance of new shares and, if the capital increase requires governmental authorization, the relevant declaration of approval.190 The capital increase becomes effective upon registration with the commercial register of the completion of the capital increase.191 The final step is the publication of the capital increase in the Federal Gazette and other designated newspapers. In contrast to the ordinary share capital increase which requires immediate subscription 57 of all new shares the conditional capital increase („bedingte Kapitalerhhung“) allows an increase of the share capital to the extent that conversion or subscription rights granted by the corporation with respect to new shares are exercised over an indefinite period of time.192 This type of capital increase is, however, admissible only to grant conversion/ subscription rights to holders of convertible bonds, to prepare a merger of companies or to grant subscription rights to employees and members of the management board of the corporation or an affiliated company.193 In addition the par value of the conditional capital may not exceed one half of the share capital as of when the respective resolution is adopted.194 If no-par shares are issued, the increased number of shares shall be in proportion to the increase of the share capital. The application for registration with the commercial register and the subscription procedure is similar to the ordinary capital increase. After application for registration of the resolution with the commercial register195 (new) shareholders may exercise their subscription right by a written notice („Bezugserklrung“)196 which has to be accepted by the corporation. Subsequently the management board issues new shares in compliance with the purpose designated in the resolution.197 Finally the management board has to file an application to the commercial register stating the extent that new shares have been issued.198 The main difference from the ordinary share capital increase is that the issuance of the new shares and not the subsequent registration with the commercial register is the decisive moment for the conditional capital increase to become effective.199 This is a consequence of the fact that the date the various (new) shareholders exercise their subscription rights is un-

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195 196

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198 199

All documents attached to the application have to be originals, duplicates or officially certified copies, § 188 sec. 5 AktG. § 189 AktG. § 192 AktG. § 192 sec. 2 AktG. Details of the purpose of the capital increase, the persons entitled to subscribe, the issue price and the distribution of the subscription have to be determined in the resolution, § 193 sec. 2 AktG. § 192 sec. 3 AktG. The amount is limited to 10 percent if subscription rights are granted to employees and members of the management board. § 195 AktG. § 198 AktG. The written notice is similar to the share certificate for the normal share capital increase. § 199 AktG, however, contrary to the normal capital increase new shares are issued only after full consideration is paid in. § 201 AktG. § 200 AktG.

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certain and therefore the share capital may be increased in several steps over a longer period; during this period neither the articles of association nor the commercial register document the current increased share capital. The management board only has to apply once – one month after the end of each fiscal year – for the registration of the issuance of all new shares in the preceding fiscal year. 58 Another flexible means to meet capital requirements in a corporation is the authorized capital („genehmigtes Kapital“). The shareholders may amend the articles of association to the extent that the management board is authorized for a period not exceeding five years to increase the share capital up to a certain amount (so-called authorized capital) fixed in the respective shareholder resolution.200 This type of share capital increase is carried out by issuing new shares in return for contributions, whereby the amount of the authorized capital may not exceed one half of the share capital as of the date of such authorization. 201 The procedure for the issuance of new shares is similar to that of the ordinary share capital increase. 202 New shares may, however, only be issued with the consent of the supervisory board.203 59 An increase of the share capital solely in favour of existing shareholders but without additional contributions from them (i. e. without the procedure of subscription, payment, etc.) is the increase of the share capital from corporation reserves („Kapitalerhhung aus Gesellschaftsmitteln“), a conversion of capital or revenue reserves (Kapitalrcklagen or Gewinnrcklagen) into share capital.204 A precondition for such an increase is that such reserves must have been recorded as free reserves205 in the underlying balance sheet206 and the annual financial statements for the last completed financial year prior to the resolution concerning the capital increase must have been adopted.207 Depending on the type of reserves there are further restrictions concerning i. a. the percentage which can be converted.208 Like the ordinary share capital increase this increase must be carried out by the issuance of new shares; corporations with no-par shares, however, may increase the share capital without issuing new shares.209 Again only one applica-

200 201 202 203 204 205

206

207 208

209

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The shareholder resolution may also contain certain regulations for the capital increase. § 202 AktG. § 203 AktG. § 202 sec. 3 AktG. § 207 et seq. AktG. If such reserves are not yet qualified as reserves the shareholders have to adopt a respective resolution. This balance sheet must be audited, approved and, bear an unqualified audit certificate and may not be older than 8 months at the date of filing the application with the commercial register, § 209 AktG. The balance sheet may not show a loss which includes an accumulated loss brought forward, § 208 AktG. § 207 sec. 3 AktG. § 208 AktG. For example, capital and legal reserves may only be converted if their aggregate exceeds 10 % of the existing share capital (or a higher percentage if stipulated in the articles of association). § 207 sec. 2 AktG.

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tion for registration with the commercial register is required210 and the registration is also the moment when the capital increase becomes effective,211 i. e. delivery/collection of the new share certificates is only a subsequent step. bb) Capital Decrease

With regard to the share capital decrease the AktG differentiates between the ordinary 60 and the simplified share capital decrease („ordentliche“ und „vereinfachte Kapitalherabsetzung“). Whereas the simplified share capital decrease212 basically refers to cases in which shareholders intend to compensate reductions in value or to cover losses shown in the balance sheet (elimination of a capital deficit),213 the ordinary share capital decrease214 can be utilized for any purpose, e. g. to repay share capital to shareholders,215 to waive claims for payment of amounts due on the original shareholder contribution or to distribute reserves. With respect to the guarantee function of the registered share capital a capital decrease is subject to many restrictions which focus, among other things, on the protection of creditor rights so that the share capital e. g. may not be decreased below the minimum amount of EUR 50,000.216 Additional restrictions for an ordinary share capital decrease are i. a.:217 creditors have to be notified about the capital decrease and they have to be informed that they can demand to have their claims against the corporation satisfied (or at least secured) even up to six months after the publication of such notice; in addition shareholders may receive payments resulting from the capital decrease only after those creditors who so demanded have been satisfied/granted security for their claims. For the simplified share capital decrease – as this type is mainly utilized in a financial crisis of a company – the observance of the various requirements pertaining to a normal share capital decrease might obstruct consolidation measures. Thus some modifications /simplifications apply as e. g.:218 – the simplified share capital reduction is not permissible as long as there exists a profit to carry forward and the legal, capital and profit reserves have to be at least partially eliminated prior to such decrease; – the amounts that are made available from such release of reserves and from the capital decrease may only be used to compensate reductions in the value

210 211 212 213

214 215

216

217 218

§ 210 AktG. § 211 AktG. § 229 AktG. In practice the simplified share capital decrease is often carried out with a subsequent share capital increase since the simple cover of losses does not suffice and the company requires fresh equity. § 222 AktG. The repayment of share capital does not infringe § 57 sec. 1 AktG, i. e. it is not qualified as a forbidden repayment of shareholder contributions. An exemption applies if the minimum par value is restored by means of a subsequent capital increase, which is resolved at the same time and which is not carried out with contributions in kind, § 228 AktG. § 223 et seq. AktG. § 229 et seq. AktG.

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of assets, to cover other losses or they may be added to the capital or legal reserves; they may not be utilized for payments to shareholders or to release shareholders from their obligation to make contributions; – dividend distributions have to observe material limitations, e. g. they may not be paid until legal and capital reserves together amount to ten percent of the share capital; – if it turns out later that reductions in value and other losses did not actually occur to the extent presumed when the resolution was passed or they were compensated, then the difference shall also be added to the capital reserve. 61 The application procedure for the commercial register is the same for both types: shareholder resolution and completion of the capital decrease have to be applied for registration with the commercial register whereby the registration of the shareholder resolution is the decisive moment for the capital decrease becoming effective.219

6.

Management Board

a)

Constitution of the Management Board

62 The management board („Vorstand“) of an AG is to be composed of one or more individuals.220 The competence to appoint and remove members of the management board is exclusively passed to the supervisory board;221 delegation to another body or person is not possible.222 If more than one person is appointed, the supervisory board may appoint one member as the chairman of the management board.223 Only natural persons (i. e. no legal entities) – shareholders or non-shareholders – with full capacities are eligible to become a member of the management board and they have to be personally reliable,224 i. e. individuals convicted of certain criminal bankruptcy offences are precluded. The articles of association can of course provide for further preconditions to be met by the designated members of the management board and also stipulate a minimum/maximum number of members. In general there are no restrictions regarding

219 220

221

222

223 224

244

§ 223, § 224, § 227, § 229 sec. 4 AktG. § 76 sec. 2 AktG, whereby corporations with a share capital exceeding EUR 3 million must have two members unless the articles of association provide for only one person; irrespective thereof the laws pertaining to labour participation may require the appointment of a so-called labour director („Arbeitsdirektor“). § 84 AktG. The necessary quorum, etc. for such resolution follows the general provisions if laws pertaining to labour participation do not provide otherwise. Only if the management board does not have the required number of members shall the competent court make the necessary appointment if requested and if the matter is urgent, § 85 AktG. § 84 sec. 2 AktG. The chairman has in general no preferential voting rights or the like. § 76 sec. 3 AktG.

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their nationality, but some commercial registers request a permanent residence in the EU for at least one member. 225 A member of the supervisory board may not serve at the same time as a member of the management board. Only for a period of up to one year may a member of the supervisory board serve as a deputy if there is a vacancy in the management board.226 The term for members of the management board shall not exceed five years; prolon- 63 gation or renewal for an additional five years is, however, permitted. 227 The appointment of the members of the management board is a corporate act different from the conclusion of the employment contract between the AG and the single members. In consequence the removal of a member of the management board does not automatically lead to the termination of the employment contract. 228 Members of the management board can only be removed (prior to the end of the term they are appointed for) for cause. 229 The appointment /removal of members of the management board has to be applied for registration with the commercial register. 230 Newly appointed members of the management board can themselves file the application concerning their appointment. Removed members of the management board can file the application concerning their removal only if the removal comes into effect on a date later than the filing of the application. In general appointment /removal becomes effective when the resolution of the supervisory board is adopted, not upon registration with the commercial register. Nevertheless the appointment /removal can be made under the condition of registration, but this might not be desirable since the date of registration will be uncertain. Regarding the registration of the appointment /removal of members of the management board with the commercial register it is important also to consider that third parties rely on the publication in the commercial register; therefore if appointment /removal of a member of the management board is not yet registered, the corporation cannot deny the appointment /removal towards third parties.231 In consequence a corporation could be bound by any legal transaction entered into by a former member of the management board who has not been erased from the commercial register. Of course this does not apply if third parties know the true facts.

225

226

227 228

229

230 231

If all members are prohibited from entering into Germany, the commercial register may argue that the corporate office/management are outside Germany and therefore deny registration. § 105 AktG. In this period the function as a member of the supervisory board cannot be exercised. § 84 sec. 1 AktG. Removed members of the management board might therefore still be entitled to receive their remuneration, § 84 sec. 3 AktG. § 84 sec. 3 AktG: Cause includes e. g. gross violation of duties, inability to conduct proper management. § 81 AktG. § 15 sec. 1 HGB.

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64 Besides revocation a member of the management board himself can resign from his function with a unilateral declaration. The declaration has to be addressed to the appointing body, i. e. the supervisory board. The resignation becomes effective upon receipt.232 65 Whereas the appointment is the corporate act of becoming a member of the management board, the service agreement – to be entered into between the supervisory board (on behalf of the corporation) and each member of the management board – is the legal act of determining the services to be rendered by the member of the management board. Since the members of the management board cannot be regarded as employees in the strict sense, the rules protecting employees in German labor law do not in principle apply. Nevertheless the service agreement contains the typical elements of an ordinary employment contract (duration, compensation, vacation, etc.). As the removal of members of the management board does not affect the service agreement, termination of the service agreement thus requires an explicit declaration by the supervisory board, too. b)

Management and Representation

66 German corporate law distinguishes between management („Geschftsfhrung“) and representation („Vertretung“): management refers to the internal allocation and scope of powers for acts and measures, representation refers to the allocation and scope of powers for acts and measures with third parties.233 Pursuant to the general rule of the AktG management and representation are carried out either by one individual member alone if the corporation has only one member in the management board, or by all members jointly if several members have been appointed. 234 The articles of association, the rules of procedure for the management board („Geschftsordnung“)235 or the supervisory board can of course determine other forms of management and representation by: – granting sole power of management and/or representation to one or several members of the management board; – granting joint power of management and/or representation to one or several members of the management board in conjunction with another member, i. e. not all (if more than two) members have to represent the AG; – granting joint power of representation to one or several members of the management board in conjunction with a registered officer holding Prokura.236

232

233 234 235

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Under certain circumstances a resignation may be deemed as an abuse of rights /violation of the service agreement and therefore be void/create a claim for damages against the resigning member. Most acts /measures carried out by the management board obviously concern both categories. § 78 sec. 2 AktG. Pursuant to § 77 sec. AktG the management board may adopt its own rules of procedure concerning the conduct of business unless the rules are referred to or taken over by the supervisory board. See the explanations under sec. II.6.d) below concerning the term „Prokura“.

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Apart from these personal restrictions members of the management board have unlim- 67 ited (material) power of representation in carrying out the business. Internal limitations, e. g. by a catalogue of business transactions, which require approval of the shareholder meeting or the supervisory board are common237 and permitted, but they have no effect towards third parties and an infringement of such internal regulations does not mean that respective transactions are void. c)

Responsibilities and Personal Liability of Members of the Management Board

The responsibility of the management board and its members is determined by a 68 hierarchic system of applicable laws,238 the articles of association, the rules of procedure for the management board and the service agreement. Some provisions, e. g. in the AktG, regarding responsibilities of the management board are mandatory and the articles of association, etc., may therefore not deviate from them. Outside these mandatory provisions, however, the supervisory board and shareholders have great flexibility to determine the responsibilities of the management board. Besides the aforementioned framework of rules the Corporate Governance Code has achieved significant importance for the conduct and responsibilities of the management of corporations as well as the cooperation between the management and the supervisory board.239 To give an (incomplete) overview, some of the main responsibilities240 for members of the management board shall be listed in the following: – observance of the due care of a diligent and conscientious businessman; – observance of and compliance with the legal requirements at the formation, i. e. payment of shareholder contributions, making correct statements to the commercial register, etc.; – filing of applications with the commercial register; – ensuring that the corporation maintains proper accounting records; – preservation of the share capital; – ensuring that the corporation does not acquire own shares contrary to § 71 AktG; – convening of shareholder meetings; – report to the supervisory board about certain business issues like business policy, profitability, course of business, transactions that have a substantial impact on the profitability/liquidity;241 – petition for the commencement of insolvency proceedings if the corporation becomes insolvent or if the assets of the corporation no longer cover the liabilities; – obligation to report to the shareholders a loss of half of the share capital; 237

238

239 240 241

Such catalogue can be agreed on by a shareholder resolution or can be included in the articles of association or the rules of procedure for the management board. Applicable laws are not just the AktG, but numerous legislative acts which address responsibilities to the management of an AG. In this context those deriving from the AktG shall be focussed on. Cf. footnote 89 above and sec. 3, 4 and 6 of the German Corporate Governance Code. Partially stated in the AktG, partially developed by jurisdiction. In addition to this reporting obligation the supervisory board may at any time request the management board to report on the company’s affairs.

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– duty to maintain secrecy; – duty not to compete with the company; – make the compliance declaration concerning the German Corporate Governance Codex together with the supervisory board once a year; – ensuring proper payment of taxes and social security contributions. 69 Corresponding to the level of hierarchy the sanctions for a violation of these responsibilities may have different severity. Possible sanctions are: administrative or criminal penalties, imposition of fines by court or governmental authorities, claims for damages, dismissal of a member of the management board for cause. d)

Other Representatives of an AG

70 In addition to the members of the management board who have by operation of law the corporate function of representing the corporation, an AG may authorize by legal transaction further individuals to represent the corporation as, e. g. registered officers with general signing powers242 („Prokuristen“) and authorized signatories243 („Handlungsbevollmchtigte“). They have – contrary to members of the management board – only a limited power to represent the corporation. Yet, this power can be extended. These representatives are appointed and revoked by the management board on the basis of its general power of representation.

7.

Supervisory Board

a)

Function, Powers and Responsibilities

71 The supervisory board is the third mandatory organ of an AG. 244 By operation of law it has to be established upon formation of the AG. It is independent of the other organs (shareholder meeting and management board) and is not subject to any instructions. Its main function is to supervise the management board245 and safeguard the interests of the corporation.246 The powers and responsibilities of the supervisory board as shaped in the AktG are:247

242

243 244

245 246

247

248

§ 48 et seq. HGB; similar to members of the management board Prokuristen have to be registered with the commercial register. § 54 HGB. Apart from the supervisory board an optional consultative or advisory council („Beirat“) with similar functions to the supervisory board can be established; however, it cannot have management functions. § 111 sec. 1 AktG. Interests of shareholders, employees, etc., might be considerable as well, but since they might deviate from the corporation’s interests, the supervisory board is obliged to focus on the latter with priority. Cf. § 90, § 111 AktG. The German Corporate Governance Codex again contains supplementary recommendations concerning function and responsibilities of the supervisory board.

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Germany 72

– appointment and dismissal of members of the management board as well as conclusion of their employment contracts;248 – supervision of the management (including the right to request a report on the affairs of the company); – inspection/examination of the company books, records and assets as well as examination and approval of the annual financial statements; – convening shareholder meetings if the affairs of the company require; – representation of the corporation towards the management board and in certain litigation procedures; – observance of the due care of a diligent and conscientious businessman; – making the annual compliance declaration concerning the Corporate Governance Code together with the management board.249 The articles of association can even extend the powers of the supervisory board so that 72 fundamental business decisions by the management board are, e. g. subject to approval by the supervisory board.250 The management itself may not, however, be transferred to the supervisory board. The supervisory board shall meet once every calendar quarter and must meet once every half-year and/or twice a half-year for listed corporations.251 To regulate internal procedures for meetings, resolutions, committees, responsibilities of the chairman and deputies in the supervisory board, etc. the supervisory board frequently sets up its own rules of procedure („Geschftsordnung“). 252 b)

Composition and Appointment, Co-Determination

Composition and appointment of the supervisory board do not exclusively follow the 73 provisions of the AktG. If a corporation is subject to labour co-determination, the respective laws are applicable as well and affect the composition and appointment of the supervisory board. The basic rule of the AktG is that a supervisory board has three members if the articles of association do not provide otherwise; in any event the number of members must be divisible by three;253 the maximum number of members is nine for corporations with a share capital of up to EUR 1,500,000, 15 for corporations with a share capital of up to EUR 10,000,000 and 21 for corporations with a higher share capital. The members of the supervisory board are elected by the shareholder meeting unless they are appointed in a special forum or elected as employee representatives pursuant to labour co-determination laws. 254 In this context the Law Pertaining the one-third Participation of Employees in Supervisory Boards („Drittelbeteiligungsgesetz“,

248 249 250

251 252 253 254

N. B. This includes determination of the remuneration of the management board, § 87 AktG. § 161 AktG. The approval requirement has only internal effect, i. e. transactions carried out without such approval are generally valid towards third parties. § 110 sec. 3 AktG. Cf. also § 107, § 108 AktG: the articles of association can contain such provisions, too. § 95 AktG. § 101 AktG.

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„DrittelbG“)255 for companies with more than 500 employees and the Co-Determination Act of 1976 („Mitbestimmungsgesetz 1976“, „MitbestG“) for companies with more than 2,000 employees256 – have to be considered:257 In addition to the provisions of the AktG the Law Pertaining the one-third Participation of Employees in Supervisory Boards stipulates that corporations which are subject to this act shall have employee representatives as one third of the members of the supervisory board258 and these representatives are elected by the employees;259 pursuant to the Co-Determination Act of 1976 a corporation which is subject to this Act must have 12, 16 or 20 members, depending on the number of employees in the corporation, whereas one half is shareholder representatives and the other half are employee representatives and the latter are elected and removed by the employees or delegates.260 From among its members the supervisory board shall elect a chairman and at least one vice chairman whom the management board has to notify to the commercial register. 261 In general any change in the membership of the supervisory board has to be published by the management board in the corporation’s designated journals and such notice has to be submitted to the commercial register (without being registered).262 74 The term of office for members of the supervisory board is generally limited to 5 years,263 but a prolongation is possible. In principle they can be removed – without specific justification or for good reasons – prior to the end of their term of office;264 for employee representatives, however, the labour co-determination laws provide for particular procedures. Members of a supervisory board generally receive for their activities a remuneration which is either stipulated in the articles of association or a shareholder resolution and which shall be reasonable with respect to the effort of the members and the situation of the corporation.265 c)

Qualifications

75 Besides full legal capacity there are few restrictions concerning the personal qualifications for members of a supervisory board: being already a member of ten mandatory 255

256

257 258 259 260 261 262 263 264 265

250

The Law Pertaining to the one-third participation of employees in supervisory boards replaced the Labour Management Relations Act 1952 („Betriebsverfassungsgesetz 1952“, „BetrVG 1952“). ”Employees” might include under certain circumstances those of affiliated companies or group companies which can increase the number significantly and therefore require the establishment of a supervisory board. Other Co-Determination laws shall not be considered because they are hardly relevant. § 4 sec. 1 DrittelbG. § 5 sec. 2 DrittelbG. § 7 MitbestG. § 107 AktG. Supplementary provisions of Co-Determination laws may also apply. § 106 AktG. § 102 AktG. § 103 AktG. Cf. § 113 AktG. If no remuneration is granted, they are entitled to have their expenditures compensated.

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supervisory boards as well as lawful representatives of the corporation itself/of companies depending on the corporation means that the person may not become a member of the supervisory board;266 lawful representatives of the management board of a parent company – in contrast – as well as shareholders can become members of the supervisory board. Of course the articles of association may establish further qualifications e. g. particular professional background/experience, etc.

8.

Selected Capitalisation and Liability Questions Concerning the AG

a)

Prohibition of Repayment of Shareholder Contributions

Preservation of the share capital has the same outstanding significance as its contribu- 76 tion.267 Corresponding to the rule that the net equity of an AG at the time of registration (cash contributions, outstanding contributions and – if provided – the value of contributions in kind) must precisely equal the amount of the share capital as stated later in the commercial register, the share capital must be preserved in the course of the business for creditors of the corporation. In consequence assets of a corporation may not be distributed to shareholders if the value of the corporation’s equity would be reduced thereby below the amount of the nominal share capital. 268 Payments to shareholders contrary to this stipulation a) must be repaid to the corporation269 and b) members of the management involved in these repayments to shareholders are liable for damages.270 b)

Capital-Substituting Loans

In general, there is no distinction between loans from third parties and shareholder 77 loans. A shareholder as a lender has the same rights and obligations as any third party. However, this principle does not apply if a loan from a shareholder is deemed to be a capital-substituting loan („eigenkapitalersetzendes Darlehen“). For an AG this is the case only if a shareholder with financial responsibilities towards the corporation271 grants a loan to the corporation at a time when shareholders acting as orderly merchants would have instead provided capital to the corporation. 272 Under these circumstances several restrictions, in particular concerning the repayment of the loan apply:273 Thus, if a shareholder loan is deemed to be a capital-substituting loan, the shareholder may not claim the repayment of the loan during bankruptcy proceedings 266 267 268 269 270 271

272 273

§ 100 AktG. Cf. sec. II.2.a)bb) above. § 57 sec. 1 AktG. § 62 sec. 1 AktG. § 93 sec. 3 AktG. Such responsibilities may arise e. g. from a qualified shareholding above 25% of the share capital or a particular own business interest in the corporation. The definition follows § 32a sec. 1 GmbHG. Basically the restrictions as stipulated in § 32 a, § 32 b GmbHG apply accordingly, but they have been made more concrete by various judgements of the Federal Court of Justice.

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or in court composition proceedings to avoid bankruptcy, whereby other legal acts of a shareholder that correspond to the granting of a loan are treated in the same manner; not only the shareholder himself but a third party (lender) might also be restricted from claiming the repayment of a loan granted if a shareholder has provided a security or assumed a guarantee for the repayment of the loan to the lender. In addition to these restrictions a shareholder might even be obliged to refund the repayment to the corporation or to provide the corporation with the securities given if a capitalsubstituting loan has been repaid within one year preceding the commencement of insolvency proceedings. 274 Besides these regulations the German Insolvency Code („Insolvenzordnung“, „InsO“) and related laws provide for further means to demand the refund of loan repayments to shareholders or third parties in case of insolvency. c)

Liability Risks in the Context of Insolvency

78 One of the fundamental obligations of the management board is to file a petition for the commencement of insolvency proceedings275 if the corporation becomes insolvent or in the event of over-indebtedness, i. e. if the assets of the company no longer cover the liabilities.276 Members of the management board failing to comply with this obligation (by negligence or by intention) are liable to compensate the corporation for any payments made after insolvency has occurred or over-indebtedness is discovered.277 The violation of this obligation is also a criminal offence which might be punished by imprisonment of up to three years or by imposition of a fine.278 In addition members of the management board may be personally liable towards single creditors for violation of a protective law.

9.

Financial Reporting/Audit and Disclosure Requirements

a)

Financial Reporting

79 Any AG – listed or not – is deemed to be a merchant by operation of law. Pursuant to § 238 HGB every merchant is obliged keeping books and records in order to show clearly the commercial transactions and the financial position of the business under observance of generally accepted accounting principles („Grundstze ordnungsgemßer Buchfh-

274 275

276

277

278

252

Cf. § 32 b GmbHG. § 92 sec. 2 AktG, whereby the petition has to be filed without undue delay, but in no event later than three weeks after the insolvency occurred. Over-indebtedness is determined in a two-step procedure: first the chances of the corporation to survive are examined; subsequently a balance sheet is drawn up which initially considers the assets with their liquidation value and then with their current value. The synopsis of the different results is the basis for an overall evaluation of over-indebtedness (the details of this procedure are quite complex and disputed and thus shall not be discussed further). § 93 sec. 3 AktG. This rule does not apply for payments consistent with the due care of a prudent businessman. § 401 sec. 1 AktG.

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9. Financial Reporting/Audit and Disclosure Requirements

Germany 80

rung“).279 In an AG the members of the management board (individually) have the duty to ensure that the corporation maintains proper accounting records. 280 Apart from keeping books and records an AG as a merchant is obliged to prepare the following documentation:281 – balance sheet („Bilanz“) showing all assets and liabilities upon the establishment of the business and at the close of every fiscal year – profit and loss statement („Gewinn- und Verlustrechnung“), i. e. for the close of every fiscal year a schedule of the expenses and revenues concerning the corresponding fiscal year – notes („Anhang“) which supplement the annual financial statements – management report („Lagebericht“)282 The balance sheet, the profit and loss statement and the notes comprise as a whole the 80 annual financial statements („Jahresabschluß“).283 The annual financial statements shall be prepared in the German language and in the Euro currency284 and have to be signed and dated by all members of the management board.285 In a corporation – domiciled in Germany – belonging to a consolidated group of companies („Konzern“) and having unified control over subsidiaries, special consolidated financial statements („Konzernabschluß“), a consolidated management report and consolidated notes – all following a detailed set of legal requirements – have to be prepared by the management of this parent company.286 Regarding the general obligations for a merchant to file and/ or publish financial information the commercial code distinguishes between small corporations, medium-sized corporations and large corporations, whereby the classification depends primarily on the company size and not on the corporate legal form. 287 The parameter determining the different categories shall be listed below. They are based on the Accounting Reform Act („Bilanzrechtsformgesetz“, „BilReG“), which entered into force on January 1, 2005 and introduced i. a. the International Accounting Standards (IAS / IFRS).288

279

280 281 282

283 284 285

286 287

288

The most relevant provisions concerning record keeping and accounting are laid down in the HGB; the AktG and – for certain large entities and group companies – the Company Disclosure Act („Publizittsgesetz“, „PublG“) contain supplementary provisions. § 91 sec. 1 AktG. § 264 and § 242 HGB. Certain non-listed small corporations may be exempted from drawing up a management report. § 264 sec. 1, § 242 sec. 3 HGB. § 244 HGB. § 245 HGB and § 91 sec. 1 AktG which states the joint responsibility of the management board. § 290 et seq. HGB, § 11 et seq. PublG. Consequences of the classification only take effect if the respective criteria are exceeded or not exceeded at the close of the fiscal year for two (2) consecutive fiscal years, § 267 sec. 4 HGB. N. B. This act transforms Regulation No. 1606/2002 of the European Parliament and of the Council.

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81 Small corporations289 are those that do not exceed at least two of the following three criteria: – balance sheet total of EUR 4,015,000 after deducting any deficit shown on the assets side – EUR 8,030,000 in turnover proceeds in the twelve months preceding the close of the fiscal year – an average of 50 employees during the year 82 Medium-sized corporations290 are those that exceed at least two criteria for small corporations but do not exceed at least two of the three following criteria: – balance sheet total of EUR 16,060,000 after deducting any deficit shown on the assets side – EUR 32,120,000 in turnover proceeds in the twelve months preceding the close of the fiscal year – an average of 250 employees during the year 83 Large corporations291 are those that exceed at least two criteria for medium-sized corporations; however, a corporation is always deemed to be a large corporation if securities issued by it are admitted or applied to be admitted for trading on an organized/regulated market pursuant to § 2 sec. 5 of the Securities Trading Act, i. e. listed corporations are deemed to be large corporations by operation of law. 84 Corresponding to this classification the requirements for setting up the financial information are different; various simplifications even apply for medium-sized and small corporations: whereas the annual financial statements and the management report shall be prepared in general by the legal representatives in the first three (3) months of the fiscal year for the preceding fiscal year, small corporations can omit the management report and the period for setting up the annual financial statements is prolonged to six (6) months;292 further simplifications for small corporations are: an abridged balance sheet293 and the exemption from various provisions concerning the notes. 294 85 The management board has to submit without delay the annual financial statements and the management report to the supervisory board after completion together with a proposal for the appropriation of any net retained profits.295 The supervisory board in turn has to examine this documentation including the proposal for the appropriation of net retained profits and – if the financial statements have to be examined by an auditor – the auditor shall attend the consultations of the supervisory board and report on the

289 290 291 292 293 294

295

254

§ 267 sec. 1. HGB. § 267 sec. 2 HGB. § 237 sec. 3 HGB. § 264 sec. 3 HGB. § 266 sec. 1 HGB. § 274 a HGB; additional simplifications for small /medium-sized corporations are stipulated in § 276, § 288 HGB. § 170 sec. 1 and 2 AktG.

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9. Financial Reporting/Audit and Disclosure Requirements

Germany 86

fundamental results of the audit.296 The results of the examination have to be issued by the supervisory board in a detailed written report to the shareholder meeting297 and to the management board.298 The approval of the annual financial statements is one of the main powers of the 86 supervisory board; the management board and supervisory board can, however, resolve that the annual financial statements shall be approved by the shareholder meeting. 299 The shareholder meeting is also competent if the supervisory board does not approve the annual financial statements.300 b)

Audit Requirements/Disclosure

The distinction between small, medium-sized and large corporations also has conse- 87 quences for the audit. All but small corporations are subject to annual statutory audit.301 The auditor302 shall report in writing and with the necessary clarity on the kind and scope as well as on the result of the examination303 and the auditor shall summarise the result of the examination in a certification („Besttigungsvermerk“) of the annual financial statements and (if applicable) of the consolidated financial statements.304 In addition to the annual statutory audit an independent accounting supervisory au- 88 thority („Prfstelle fr Rechnungslegung“) has been established. Pursuant to the Accounting Revision Act („Bilanzkontrollgesetz“, „BilKoG“),305 which amends the Commercial Code, this authority examines whether the financial statements and the management report comply with the statutory laws and the generally accepted accounting principles.306

296 297

298

299 300 301

302

303 304 305 306

§ 171 sec. 1 AktG. § 171 sec. 2 AktG. The report has to state the manner and extent of the examination and whether the annual financial statements are approved or if there are objections; for listed corporations it also has to state, among other things, which committees have been established in the supervisory board; if the annual financial statements have been audited, the report also has to refer to the results of the audit. § 171 sec. 3 AktG: The report to the management board has to be submitted within one month after the supervisory board received the above-mentioned documentation from the management board. § 172 AktG. § 173 sec. 1 AktG. § 316 sec. 1 HGB. For small corporations the articles of association can provide for an obligatory audit. Pursuant to the Accounting Reform Act the choice of the auditor is subject to significant restrictions, which shall ensure the objectivity of the auditor, § 319 and § 319 a HGB. § 321 sec. 1 HGB. § 322 sec. 1 HGB. The Accounting Revision Act entered into force on January 1, 2005. §§ 342b et seq. HGB.

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89 The annual financial statements and the result of the audit (if requested) have once to be disclosed both to the competent commercial register and the public:307 the annual financial statements together with the auditors’ certification (or its denial) have to be filed with the commercial register of the corporation’s domicile without undue delay after their presentation to the shareholders, but at the latest prior to the expiration of the twelve (12) months of the fiscal year following the close of the fiscal year; the annual financial statements have to be supported (if applicable) by the management report, the supervisory board’s report, the proposal for the appropriation of the results and the resolution as to their use, specifying the annual surplus or deficit. After the filing of this documentation with the commercial register the management board shall publish the name of the commercial register and the register number where these records have been filed in the Federal Gazette. 308 With regard to the classification of the size of corporations the following additional aspects have to be considered:309 – Large corporations have to publish the documentation in the Federal Gazette first; then the publication itself together with the documentation has to be filed with the commercial register; a further publication in the Federal Gazette is not requested. 310 – Small corporations have to submit only the balance sheet and the notes to the commercial register; the notes need not contain the information relating to the profit and loss statement. 311 – Medium-sized corporations have some simplifications regarding form and content of the balance sheet and the notes.312 90 The competent register court will examine in a final step the completeness and correctness of the publication of the documentation submitted to the commercial register. 313

10. Taxation 91 German tax law is well renowned for being complicated. It does not follow a unilateral taxation system for all types of business enterprises corresponding to their economic efficiency, but has a very detailed set of rules for each single type of business enterprise so that the choice of the legal form may have significant consequences for taxation and consequently competitiveness. In the following only some general aspects of the taxation of an AG and its shareholders are outlined.

307 308 309 310 311 312 313

256

§ 325 sec. 1 HGB. § 324 sec. 1 HGB. Additional requirements have to be observed for group companies. § 325 sec. 2 HGB. § 326 HGB. § 327 HGB. § 329 HGB, whereby this examination does not refer to material aspects.

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10. Taxation

Germany 92

An AG is subject to various taxes which are basically related to the income314 of the 92 corporation:315 – corporate income tax („Krperschaftsteuer“) – solidarity surcharge („Solidarittszuschlag“) – dividend withholding tax („Kapitalertragsteuer“) – trade tax on income („Gewerbesteuer“) The corporate income tax rate is unilaterally316 25%317 on the worldwide318 income of 93 the corporation, whereby income is defined as the difference between the net value of a corporation319 at the end of a fiscal year and the net value at the end of the preceding fiscal year. 320 In addition to the 25% corporate income tax the so-called solidarity surcharge („Solidarittszuschlag“) is levied at a rate of 5.5% of the assessed corporate income tax amount.321 The unilateral corporate income tax rate became effective in 2001 in the course of an extensive tax reform, which introduced i. a. the so-called “halfincome system” („Halbeinknfteverfahren“)322 within the Income Tax Code. The major aspects of the half-income system are in principle a) to avoid multiple taxation within group companies and therefore disregard dividend distributions between companies323 and b) to tax dividends only at 50 %324 if distributed to individual shareholders /partner-

314 315

316

317

318

319

320 321

322 323

324

Taxes on net assets or capital of an AG have recently been abolished. There are of course numerous further taxes to be considered, which are not related to the income as e. g. Value Added Tax („Mehrwertsteuer“), Wage Tax („Lohnsteuer“), Real Estate Tax („Grundsteuer“), Real Estate Transfer Tax („Grunderwerbsteuer“); they shall not be included in this overview. Previously there had been different rates under the “imputation system” („Anrechnungsverfahren“) depending on whether profits were retained or distributed. This system which aimed to avoid double taxation entitled shareholders (individual and corporate) upon distribution of dividends to credit the corporate income tax paid by the AG against the individual or corporate income tax. § 23 sec. 1 Corporate Income Tax Code („Krperschaftssteuergesetz“, „KStG“); it is intended to reduce the tax rate with effect as of 1/1 /2006 to 19%. § 1 KStG; in contrast non-resident companies doing business in Germany are taxed only on income from sources inside Germany, § 2 KStG. The net value is determined on the basis of the “tax balance sheet” („Steuerbilanz“), a derivative of the commercial balance sheet („Handelsbilanz“) adjusted with respect to mandatory tax law provisions. As far as the scope of taxation and determination of profits and income is concerned, the KStG in principle refers to the provisions of the Income Tax Code („Einkommensteuergesetz”, „EstG“). § 8 KStG, § 2 sec. 2, § 4 EStG. § 4 Solidarity Surcharge Act („Solidarittszuschlaggesetz“); the surcharge has been introduced to collect additional funds for the financing of the German unification. § 3 no. 40 EStG. § 8b KStG, in fact only 95% of dividends are tax exempt as § 8b sec. 5 KStG deems 5% of these dividends as non-deductible expenses. § 3 no. 40 d, § 20 sec. 1 no. 1 EStG.

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ships.325 This principle is applied accordingly to capital gains on the sale of shareholdings: those are tax exempt for corporate shareholders,326 concerning individual shareholders they are in principle subject to 50 % individual income tax. 327 As a countermove to these benefits the following restrictions have been introduced for shareholders: expenses incurred in connection with the shareholding will only be 50 % deductible for individual shareholders328 and for corporate shareholders they are limited to the amount the expenses exceed tax-free domestic dividends in the given accounting period.329 Neither the corporate income tax nor the solidarity surcharge are tax-deductible expenses, i. e. no tax credit („Steueranrechnung“) will be granted.330 94 The tax levied on dividends is a withholding tax („Kapitalertragssteuer“),331 i. e. it must be withheld at source. This procedural simplification of course has to be taken into account for the individual taxation of the shareholder. In consequence the withholding tax paid on dividends is deemed to be a tax credit with respect to the income tax/ corporate income tax payable by a resident shareholder. For a non-resident shareholder this form of tax credit is generally not available, but its tax rate might be reduced. The procedure of computation of the income form capital investment is quite complicated and for the tax assessment even tax exempted dividends as mentioned above are included.332 The tax rate varies depending on the person bearing the tax (company itself or shareholder) and the domicile of the shareholder (resident or non-resident): if the company bears the withholding tax, the rate is 25%; if the shareholder bears the tax, the rate is generally 20 %.333 However, the tax rate of 20 % can be reduced under certain preconditions to 0 % for EU parent companies holding a) at least 20 % of the share capital of the corporation and b) for a minimum period of 12 months.334 95 An AG is further levied with trade tax on its income. The basis for assessment is again the taxable income for corporate income tax purposes which is, however, subject to several adjustments, i. e. add-backs and/or deductions.335 Some practically relevant adjustments are the add-backs of half of the interest expenses on long-term debts related to the business,336 which have been deducted within the computation of the profit (for income tax purposes) and – in particular cases, e. g. if the shareholding is below 10 % – 325

326 327

328 329 330 331 332 333 334

335 336

258

N. B. On the level of the distributing company it is irrelevant for corporate income tax purposes whether dividends are distributed or not. § 8 b sec. 2 KStG. § 3 no. 40 a, b, c, j EstG; exemption limits apply if the assets are not deemed to be business property. § 3c sec. 2 EStG. Cf. footnote 323 and § 8b sec. 5 KStG: 5% of dividends is qualified as non-deductible expense. § 26 KStG grants exemptions for foreign income under certain conditions. § 43 sec. 1 no. 1 EStG. § 43 sec. 1 no. 1 s. 3 EStG. § 43a sec. 1 no. 1 EStG. § 43 b EStG. For non-EU parent companies the reduced tax rate follows double taxation treaties. § 7 et seq. Trade Tax Code („Gewerbesteuergesetz“, „GewStG“). In consequence equity and borrowed capital are treated equally.

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11. Dissolution of a Corporation/Termination of the Business

Germany 96

the add-back of dividends even they are tax exempt for income tax purposes. 337 On the other side e. g. dividends from partnerships – if the AG is deemed to be a co-entrepreneur /partner for tax purposes („Mitunternehmer“)338 or from companies – if the AG has a privileged investment („Schachtelbeteiligung“), i. e. a shareholding of more than 10 % – may be deducted.339 The trade tax on income is determined and levied by the municipality where the business is carried out340 so that the assessment rate varies: In general the tax rate has a range from 15-20 %. Trade tax on income is a deductible expense for corporate income tax purposes.

11. Dissolution of a Corporation/Termination of the Business Reasons for the dissolution of a corporation are, among other things:341 – expiration of the time set forth in the articles of association – resolution of the shareholders (notarisation is not required) – commencement of insolvency proceedings over the assets of the corporation – judgement of the register court finding that there is a defect in the articles of association – lack of assets

96

The dissolution of the corporation must be filed by the management board for entry 97 in the commercial register stating the date and the reason for the dissolution342 and – if appointed – the liquidators.343 As with every application to the commercial register the signatures of the lawful representatives of the corporation have to be authenticated by a notary. Together with the application the representatives have to submit proof of the dissolution which is normally the original or certified copy of the shareholder resolution concerning the dissolution of the corporation. The dissolution must be published by the liquidators in the designated public papers (Federal Gazette, etc.)344 on three separate occasions. By this public notice creditors are simultaneously requested to file their claims with the corporation, i. e. document any claims against 337 338

339 340

341

342

343

344

§ 8 Trade Tax Code. The term “partner for tax purposes” is not defined in a strict sense, but court decisions generally attribute to it entrepreneurial initiative and participation in profit and loss. § 9 Trade Tax Code. Depending on the structure of the corporation, trade tax on income might therefore be split among several municipalities. § 262 AktG, the articles of association can of course state further reasons for dissolution. Another reason to dissolve a corporation is endangering the common good by the lawful representatives, § 396 AktG. § 263 AktG, the court itself must register ex officio the dissolution and cause in particular cases (insolvency proceeding, ruling of the registration court). § 266 AktG. Within the liquidation so-called liquidators who are either the former members of the management board or appointed third persons take over the rights and obligations of the management, § 265, § 269 AktG. Only in case of insolvency proceedings management / representation is dedicated to a specialized insolvency administrator. § 267 AktG.

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the corporation. Apart from the publication in the public papers the competent court of the commercial register must publish ex officio the registration of the dissolution.345 Contrary to, e. g. amendments of the articles of association, the registration with the commercial register is not a precondition for the dissolution becoming effective: the adoption of the respective shareholder resolution is the initial act for the effectiveness. Only the publication in public papers has a particular function since the liquidation may at the earliest be completed one year after the day on which the third notification to creditors has appeared in the public papers. 346 The fact that a corporation is in the process of liquidation has to be documented towards third parties by adding to the corporation name the term „in Liquidation“ or a common abbreviation as „i. L.“.347 98 The liquidators shall wind up current transactions, collect outstanding receivables, realise the assets of the company and satisfy the creditors. 348 They may even enter into new business if this is necessary to terminate uncompleted transactions. In the course of the liquidation the liquidators have to prepare an opening balance sheet („Liquidationserffnungsbilanz“ bearing the date of the dissolution of the company and a report explaining the opening balance sheet as well as prepare annual financial statements and a management report at the end of each year during the liquidation and prepare a final balance sheet („Liquidationsschlussbilanz“) bearing the date of the completion of the liquidation:349 The balance sheets prepared by the liquidators have to be approved by a shareholder resolution and audited; however, the corporation can be released from the audit requirement by the competent court if the situation of the corporation is very apparent. 99 The final act of the liquidation is the distribution of the liquidation proceeds350 after completion of the waiting period of one year after the date when the third notification to creditors was published in the public papers. The assets of the corporation are then distributed (in cash if not provided or resolved otherwise) to the shareholders in principle pro rata to their shareholdings. 351 If the liquidation has been completed and the final accounts have been drawn up, the liquidators shall apply for the registration of the completion of the liquidation with the commercial register.352 The corporation will then be deleted in the commercial register and ceases to exist. Upon completion of the liquidation the register court determines a safe place where the corporation’s books and records shall be deposited for a period of ten years and the court may permit shareholders and creditors to inspect them. 353

345 346 347 348 349 350 351 352 353

260

§ 10 HGB. § 272 sec. 1 AktG. § 268 sec. 4 AktG. § 268 sec. 1 AktG. § 270 AktG. § 271 sec. 1 AktG. § 271 sec. 2 and 3 AktG. § 273 sec. 1 AktG. § 273 sec. 2 and 3 AktG.

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12. Limited Partnership with Share Capital – KG a. A.

Germany

100

12. Limited Partnership with Share Capital – KG a. A. Besides the AG the AktG354 provides for another corporate form with its own (separate) 100 legal personality combining elements of an AG with those of a partnership: The limited partnership with share capital („Kommanditgesellschaft auf Aktien“, „KG a. A.“).355 Similar to the AG the KG a. A. has a share capital that is comprised of shares; by operation of law the shareholders – so-called limited shareholders („Kommanditaktionre“) – are not personally liable for liabilities of the partnership.356 Contrary to the AG and similar to a typical limited partnership357 the KG a. A. has in addition to the limited shareholders at least one general partner („Komplementr“) who has unlimited liability with respect to the creditors of the limited partnership.358 It is admissible, however, that the general partner is, e. g. a GmbH and thereby reduces the general unlimited liability to a liability limited to the assets of the GmbH.359 Irrespective of this hybrid structure the KG a. A. is deemed to be a corporation. a)

Formation/Constitution

The formation procedure of a KG a. A. principally follows that of an AG. The most 101 relevant differences are that a KG a. A. requires at least five persons for the preparation of the formation deed,360 but not all of them have to subscribe to shares.361 The articles of association are distinct from those of an AG to the extent they have to contain the last name, first name and place of residence of each general partner as well as the amount and kind of contributions of the general partner(s) which are not made in consideration for the issuance of the share capital. 362 The hybrid structure of the KG a. A. also affects its constitution and legal affairs and they vary to some extent from those of an AG: – Management and representation in a KG a. A. are carried out by the general partner(s),363 a KG a. A. has no management board;364 the supervisory board and shareholder meeting365 are nevertheless mandatory bodies of the KG a. A. 354

355

356 357

358 359 360

361 362

§ 278 – § 290 AktG. The provisions of the commercial code concerning general and limited partnerships, § 105 et seq., § 161 et seq. HGB, as well as the provisions for non-commercial partnerships in the Civil Code, § 705 et seq. BGB apply apart from the provisions of the AktG. There are less than 100 KG a. A. in Germany. Thus this business form shall be described only in brief. § 278 sec. 1 AktG. Cf. sec. I.1.b). The limited partnership is an adaptation of the general partnership and the provisions governing the latter also apply– with some modifications – to the limited partnership, § 161 sec. 2 HGB. Besides that the provisions for non-commercial partnerships in the Civil Code apply, § 105 HGB. § 278 sec. 1 AktG. Cf. § 279 sec. 2 AktG. § 280 sec. 1 AktG. After formation a KG a. A. can exist even as a one-person entity („Einmanngesellschaft“), i. e. having only one general partner who is at the same time the limited shareholder. § 280 sec. 2 AktG. § 281 AktG.

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– A general partner is not obliged to make a contribution to the share capital; a general partner can, however, be a limited shareholder at the same time – The influence of co-determination of employees is much more restricted; the supervisory board has, e. g. no influence on the selection of the general partner(s). – The legal relationship among the general partners and between the general partners and the limited shareholders and third parties is governed by the provisions of the Commercial Code pertaining to limited partnerships; the provisions of the AktG apply only secondarily.366 Thus the shaping of the articles of association of the KG a. A. as well as the competences and responsibilities of the management, i. e. the general partner(s), is much more flexible than in an AG. – Certain types of shareholder resolutions – approval of the annual financial statements, among other things – require the consent of the general partner(s). 367 b)

Change of General Partners and Limited Shareholders, Dissolution

102 The formalities for a change of membership in a KG a. A. are different for general partners and limited shareholders: For limited shareholders joining and leaving is quite simple since the general provisions of the AktG apply; general partners, however, can join and leave a KG a. A. only by the formal procedure of amending the articles of association, i. e. on the basis of a formally recorded shareholder resolution, which has to be applied for registration with the commercial register. As a KG a. A. has its own legal personality, its existence does not in principle depend on the existence of its general partners and limited shareholders. This is obvious with regard to limited shareholders, but applies accordingly for general partners death, termination of the articles of association by one partner or commencement of insolvency proceedings pertaining to the assets of a partner,368 however, dissolution is the inevitable consequence if the KG a. A. has only one general partner and no substitute partner is found. Dissolution of a KG a. A. further takes place if the shareholders adopt a respective resolution,369 if insolvency proceedings pertaining to the assets of the KG a. A. are commenced370 or by a judicial decision.371 The dissolution is followed by the liquidation which is similar to the liquidation procedure for an AG (winding up of the business, collecting of claims, converting of assets into cash, paying of creditors, distribution of remaining cash to limited shareholders, etc.).

363 364

365

366 367 368 369 370

371

262

Cf. § 114, § 125, § 161 sec. 2 HGB, § 278 sec. 2 AktG. However, the provisions governing the management board of an AG apply in principle to the general partners, too, § 283 AktG. Limited shareholders are excluded from the management but have the right to inspect the affairs of the partnership, § 166 HGB. § 278 sec. 2 and 3 AktG. § 285 sec. 2 AktG. § 131 sec. 3, § 162 sec. 2 HGB, § 289 sec. 1 AktG. § 289 sec. 4 AktG. For the commencement of insolvency proceedings pertaining to the assets of the partnership the special provisions of the Insolvency Code (and not those of the Commercial Code) apply. § 131 sec. 1, § 162 sec. 2 HGB.

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1. Character of the GmbH

c)

Germany 103

Taxation, Financial Reporting/Audit Requirements

As the KG a. A. is deemed to be a corporation, taxation of a KG a. A. follows the same 103 principles as for an AG,372 however, the existence of the general partner(s) requires a modification: payments to the general partner(s) like profits /remuneration for management activities are deductible expenses of the KG a. A.373 In consequence the general partner(s) is /are subject to his /their individual taxes, i. e. income tax for individuals and corporate income tax for companies /corporations: their income includes distributed profits, remuneration for management activities and deemed business income („Sonderbetriebseinnahmen“). Financial reporting and audit requirements as well follow the principles explained above 104 regarding the AG.374

III. The Limited Liability Company – GmbH 1.

Character of the GmbH

The corporate form „GmbH“ („Gesellschaft mit beschrnkter Haftung“)375 can be 105 characterized as a derivate of the „AG“ modelled for smaller and in general private business enterprises which conduct their business under a regime of limited liability. In principle only the assets of the company and not the shareholders themselves are available to satisfy the claims of the company’s creditors. A clear and constant shareholder structure is typical for a GmbH and frequently the shareholders themselves take over the management of the company. Even without being managing directors they retain the control in the company since shareholders have the ability to instruct the management. The typical GmbH therefore has a two-organ structure consisting of the shareholder meeting and the management, a structure which allows flexibility both in administration and in business. This effect is supported by the applicable laws which offer a wide scope to shape the bylaws of the company corresponding to the interests and needs of the shareholders and the business. So the structure and even the functioning of a GmbH is quite simple; joining and leaving a GmbH does, however, follow quite a formal procedure which was established in the GmbHG to consider the personal structure and the particular interests of shareholders in private business enterprises. Currently there are far more than 800,000 GmbHs in Germany.

372 373 374 375

Cf. sec. II.10. § 9 sec. 1 KStG. Cf. sec. II.9. The statute governing the GmbH is the Law pertaining to Companies with Limited Liability („Gesetz betreffend die Gesellschaften mit beschrnkter Haftung“, „GmbHG“). To some extent other statutes such as the Commercial Code and the Stock Corporation Act apply (directly or indirectly) as well. For purposes of simplification the various German abbreviations are also used in this book.

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Formation of a GmbH

III. The Limited Liability Company – GmbH

106 For a GmbH to become legally existent a number of steps starting with the formation and concluding with the registration in the commercial register have to be completed: a)

Formation Procedure

aa)

Execution of the Formation Documents

107 The initial step to form a GmbH is – similar to an AG – the execution of the formation deed („Grndungsprotokoll“) and the articles of association („Gesellschaftsvertrag/Satzung“) in notarial form. 376 One or more shareholders (individuals, legal persons or even partnerships – regardless of their domicile) may form a GmbH. The formation deed, which has the quality of a shareholder resolution, documents the intention of the founder(s) to establish the company with its necessary bylaws, i. e. the articles of association. From a practical viewpoint it should also contain the appointment of the initial management of the company. 377 The articles of association which are internally and externally the most important shareholder agreement can be integrated in the formation deed itself. In practice, however, both documents are formally separated since the formation deed often contains additional agreements between the founders which do not need to become part of or be connected with the articles of association. Both the formation deed and articles of association have to be signed by the founders.378 The signing of the formation deed and the articles of association by proxy is permitted; however, it requires a notarised power of attorney or a power of attorney on which the signatures are authenticated by a notary.379 The formation of a GmbH abroad – carried out by a German consul – is generally accepted but should in any case be clarified with the competent commercial register judge. 380 108 The decisive moment for a GmbH to become a legally existing entity is not the execution of the formation documents, but the registration of the GmbH with the commercial register. 381 In the period between these two steps there is – generally speaking – an unrestricted personal liability of those acting in the name of the company (e. g. founders and managing directors) and such liability can only be avoided individually by explicit agreement with the contracting (third) parties. At this stage the

376

377

378 379

380

381

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Notarial form pursuant to § 2 sec. 1 GmbHG means the formal recording („Beurkundung“) of the formation documents by a notary, cf. footnote 24. The appointment of the management may be included as well in the articles of association. As a consequence, however, a change of the management means an amendment of the articles of association which is quite a formal procedure, cf. sec. III.5.b) below. § 2 sec. 1 GmbHG. § 2 sec. 2 GmbHG; authenticating also means a formal recording by a notary, but he verifies only the identity of the signatory signing the document. For a notarisation carried out by a foreign notary observing German standards of notarisation (e. g. in Switzerland, Austria or the Netherlands) cf. footnote 35. For each individual case it is therefore advisable to contact the competent commercial register in advance. § 11 sec. 1 GmbHG.

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2. Formation of a GmbH

Germany 109

company is considered to be a specific entity of its own,382 which is to some extent similar to a partnership; however, it enjoys particular rights necessary to participate in business and even the GmbHG and the articles of association apply where suitable. Upon registration the rights, obligations and contracts entered into by the “pre-incorporation company” are transferred to the GmbH. Simultaneously the personal liability of persons acting for the company expires and is taken over by the GmbH as well. bb) Original Shareholder Contributions and Their Payment Prior to Registration

A GmbH must have a share capital amounting to at least EUR 25,000.383 The share 109 capital is composed of the original contributions („Stammeinlagen“) of the shareholders. In the amount as registered with the commercial register the share capital is a guaranteed minimum fund for creditors. Under a regime of limited liability therefore the contribution itself but also the maintenance of this guaranteed fund is of paramount significance. 384 The original contribution of each shareholder must total a minimum of EUR 100;385 any higher contribution must be divisible by fifty.386 In the amount of the original contributions GmbH-shares („Geschftsanteile“) come to existence, however, only upon registration of the company with the commercial register. The contribution may be of a different amount for each shareholder, but a shareholder may not subscribe to more than one contribution at the time the company is established.387 The consideration for the original contributions can be effected through the shareholders either in cash – so-called “contributions in cash” („Bareinlagen“) – on the one hand or in kind – so-called “contributions in kind” („Sacheinlagen“)388 as for example real estate, buildings, patents, copyrights, know-how – on the other hand. Regarding contributions in kind, the assets comprising those as well as the amount of the contribution they are to cover must be stated in the articles of association.389 The shareholders further have to submit a report on the formation with contributions in kind („Sachgrndungsbericht“) which must set out the major considerations supporting the appropriateness of the valuation of the non-cash contributions and if a business is transferred to the company the results of the last two fiscal years. 390 A quarter of each cash contribution has to be paid in prior to registration and the total 110 paid up share capital, including both cash contributions and the full amount of contributions in kind, must equal at least half of the minimum share capital, i. e. EUR 12,500. 391 Contributions in cash have to be paid to a bank account392 of the GmbH 382 383

384

385 386 387 388

389 390

So-called pre-incorporation company („Vorgesellschaft“). § 5 sec. 1 GmbHG. N. B. It is intended to reduce the mandatory minimum amount to EUR 10,000 with effect as of 01/01/2006. For the concept of contribution and maintenance of the share capital see also sec. III.8.a) below. § 5 sec. 1 GmbHG. § 5 sec. 3 GmbHG. § 5 sec. 2 GmbHG. At formation original contributions must be paid in cash unless the articles of association provide for a contribution with other assets than cash. § 5 sec. 4 GmbHG. § 5 sec. 4 GmbHG.

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which has to be opened by the initial management. If the company is formed by only one person the registration cannot be applied for unless a) the total share capital is paid up or b) if said minimum amounts are paid up and the shareholder in addition has provided security for the remaining cash contribution not paid up.393 The same payment requirements apply if – after formation by several shareholders – all shares are held by one shareholder or additionally by the company itself within three years after registration.394 Contributions in kind must be fully effected before application for registration with the commercial register in such a way that the assets are permanently at the free disposal of the managing directors and this amount may not be reduced prior to the registration with the commercial register.395 This is the consequence of the general rule that the net equity of a GmbH at the time of registration must definitely equal the amount of the share capital as stated subsequently in the commercial register.396 Otherwise the commercial register will reject the application for registration and the subscribing shareholder is liable for the shortfall between the value of a contribution at the time of application and the amount of the original subscribed contribution and has to pay the shortfall to the GmbH in cash („Differenzhaftung“). 397 The same liability is incurred if the stated amount of shareholder contributions in total has been reduced by transactions before the registration, etc. In such a case all shareholders are obliged to pay the total shortfall in proportion to the stated amount of their contributions, i. e. there is no limitation of their obligation to the total amount of the stated share capital. Managing directors therefore should be very cautious carrying out business prior to registration and thereby reducing the net equity of the company. 111 Besides the original shareholder contributions the articles of association can provide for additional payments („Nachschsse“) to be contributed by the shareholders.398 These additional payments which frequently have the function of endowing the company with liquidity without applying the formal procedure of a share capital increase do not belong to the share capital and therefore do not have to be paid in prior to registration.

391 392

393 394 395 396

397 398

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§ 7 sec. 2 GmbHG. Banks generally request certified copies of the formation documents for the opening of a business bank account. The bank statement confirming receipt of the shareholder contributions is subsequently required for the registration of the GmbH with the commercial register. § 7 sec. 2 GmbHG. § 19 sec. 4 GmbHG. § 7 sec. 3 GmbHG. The share capital may solely be reduced by costs directly related to the formation (“Grndungskosten”). If the company is to bear these costs, it should be explicitly stated in the articles of association. § 9 sec. 1 GmbHG. § 26 et seq. GmbHG. See also below sec. III.3.

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2. Formation of a GmbH

b)

Germany 112

Registration Procedure/Commercial Register

After the formation documents have been properly executed and contributions have 112 been made, the formation of the GmbH has to be applied for registration with the commercial register („Handelsregister“). 399 The following documents have to be attached to the application:400 – notarial formation deed and articles of association – power of attorney if founder(s) have been represented by proxies – evidence of appointment of the managing directors (included in the formation deed or the articles of association) – list of shareholders signed by the applicants showing full name, date of birth and domicile as well as the original contribution of each shareholder (authentication or the like of the signatures of the applicants is not required) – if contributions in kind are agreed on, the contracts underlying the amounts attributed to the contribution in kind or serving to effect them and the report on the formation with contributions in kind; furthermore documents showing that the value of the contributions is equivalent to the amount of the corresponding original contribution which the shareholder has assumed – the appropriate licence document, in case the business objective of the company requires government approval. The application for registration with the commercial register has to be signed by all401 113 initial managing director(s) personally; no representation is permitted and the signatures have to be authenticated. Together with the application the managing directors have to assure that:402 a) the shareholder contributions (in cash and in kind) have been effected and permanently placed at their free disposal (and if the company has only one shareholder that the required security has been provided), b) that there is no hindrance in their person for the appointed as managing directors and c) that they have been adequately instructed on their disclosure duties to the court. The application for registration must further contain details of the managing directors’ powers of representation (sole power or joint power of representation, release from the restrictions of self-contracting pursuant to § 181 BGB) and the business address of the company. Finally the managing directors have to deposit a copy of their signature with the commercial register in authenticated form. This is usually done with the signing of the application for registration in front of a notary. The application for registration will be directed to the commercial register of the local 114 court („Amtsgericht“) under whose jurisdiction the company’s registered office will fall.403 The competent judge at the commercial register examines the application for registration including the various attachments and he is also responsible for verifying 399 400 401

402 403

§ 7 sec. 1 GmbHG. § 8 sec. 1 GmbHG. § 78 GmbHG; other applications to the commercial register have to be signed by the managing directors according to their power of representation (sole/joint power of representation). § 8 sec. 2 GmbHG. For more details concerning the commercial register cf. sec. II.2.b) above.

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whether – in case of contributions in kind – proper values have been attributed to the assets. The judge further contacts the local chamber of industry and commerce („Industrie- und Handelskammer“), e. g. if there are any objections against the business name.404 115 Upon registration with the commercial register the GmbH comes into existence as an entity with its own legal capacity. 405 The commercial register extract for a company shows the following details:406 – company’s name – registered office – business objective – date of adoption of the articles of association – name(s) of the managing director(s), name(s) of registered officers holding a general signing power, so-called „Prokuristen“ – amount of the share capital of the company – duration of the company if this has been limited in the articles of association 116 The registration of the company with the commercial register including the relevant information concerning the company is subsequently published by the competent register court in the Federal Gazette („Bundesanzeiger“) and at least one newspaper.407 117 Upon registration of the GmbH with the commercial register the business of the GmbH is deemed by operation of law to be a commercial business, i. e. the GmbH itself is regarded as a merchant („Kaufmann“) under the Commercial Code408 and therefore subject to the obligations and responsibilities established therein (e. g. bookkeeping). 409 c)

Governmental Permission

118 With respect to the requirement of governmental permission for certain types of business activities the same principles as for an AG apply.410 d)

Shelf Companies

119 An alternative to the formation of a GmbH is the acquisition of a shelf company (an existing GmbH established for this special purpose, so-called „Vorratsgesellschaft“) or an inactive company (which has been active in business earlier, so-called „Mantelgesellschaft“). Often the idea behind this measure was to save time, especially considering registration periods of some weeks at particular commercial registers. However, the 404 405 406 407 408 409 410

268

Cf. sec. II.2.b) above. § 11 sec. 1 GmbHG. § 10 GmbHG. § 10 sec. 1 HGB, § 10 sec. 3 GmbHG. § 2 HGB. Cf. sec. II.2.b) above and sec. III.9. below. Cf. sec. II.2.c) The obligation to submit a required permit to the commercial register is established in § 8 sec. 1 no. 6 GmbHG.

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3. The Shareholder

Germany 120

acquisition of shelf companies causes additional costs for the shareholders: apart from the purchase price for the company (amount of the share capital plus a service fee) they have to pay the notary (and attorney) fees related to the transfer of the shares from the old shareholders to the new shareholders. In addition recent judgements have set up a more restrictive liability regime for shareholders and managing directors when acquiring shelf companies and filing the application for registration with the commercial register. Finally when acquiring an inactive company there is always the danger that there are hidden liabilities (private or public) so that the acquisition of shelf companies should only be regarded as a compromise. e)

Cost/Duration

Notary and court fees including registration fees and costs for the publication in the 120 Federal Gazette for a GmbH with a share capital of EUR 25,000 amount to approximately EUR 1,250.411 Attorney fees may vary depending on the structure of the company, the complexity of the articles of association (e. g. different types of contributions by shareholders, establishment of an advisory board, restrictions in the transferability of shares). Preparation of the relevant documents and subsequent notarization can be completed 121 short-term if all information regarding the company is available and has been verified. The registration process after filing the application may vary from a few days (if the formation is straight forward, e. g. only shareholder contributions in cash, all documents have been properly prepared and there is prior coordination of the formation with the competent commercial register) up to several weeks if the commercial register has to perform an extensive examination (examination of contributions in kind, etc.). f)

Requested Information on Business Letters

The requirements for information on business letters are the same as for an AG.412 122

3.

The Shareholder

Two alternatives should be distinguished for becoming a shareholder of a GmbH: initial 123 membership by assuming a shareholding at the formation or through a capital increase and derived membership by acquisition or inheritance of a shareholding. Derived membership is of course inevitably linked with the termination of membership for the transferring shareholder. The personal structure – which is often found in a GmbH – additionally requires the possibility for a shareholder to withdraw from the company (e. g. if no buyer for the share can be found) on the one hand and for shareholders on the other hand to exclude a shareholder from the company (e. g. if a cooperation is no longer possible). These means of exclusion and withdrawal are not stipulated in the 411

412

The registration process at the register court will commence only upon payment of the registration fee. Cf. sec. II.2.f) and § 35 a GmbHG.

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124

Germany

III. The Limited Liability Company – GmbH

GmbHG itself; however, they are generally accepted by permanent jurisdiction and there exists casuistry to determine the admissibility. Shareholders who withdraw or have been excluded are entitled to receive a termination payment. Additional means to terminate the membership of shareholders by force and which are stipulated in the GmbHG are: redemption/amortization of (fully paid in) shares („Einziehung“) if permitted for particular cases in the articles of association,413 exclusion of defaulting shareholders („Kaduzierung“) if they fail to pay the original contribution,414 abandonment of the share if the liability for additional payments („Nachschsse“) has not been limited and if a shareholder is not willing to pay them up.415 a)

Rights and Duties of a Shareholder

124 The general rules that apply in a GmbH are: “one shareholder, one share” and “equal rights and obligations for all shareholders”. A derivation from this rule which is also stipulated in the GmbH-law is the principle of a uniform shareholding, i. e. all rights and obligations of a shareholder are manifested in one share. The rights and duties of shareholders are laid down in the GmbHG, the articles of association and shareholder resolutions which are adopted in accordance with the articles of association. The rights and obligations of shareholders can be categorized as follows: Rights: – administration rights (right to vote on shareholder resolutions, information/inspection rights) – property rights (dividend right, right to the proceeds of liquidation) Obligations: – allegiance/loyalty – duty to pay in the original contribution – obligation to make additional payments (only if stipulated in the articles of association; articles can even provide for an unlimited obligation) – other obligations (obligation not to compete with the company, obligation to make certain assets available to the company, etc.) 125 In general, rights and obligations (e. g. dividend right, obligation to make the shareholder contribution) are linked to the ownership of the share in the company; however, some are linked to the person of the shareholder (e. g. the exclusive right to appoint the management, the obligation to provide specific services to the company). The former can be described as statutory rights and obligations which also affect third parties, whereas the latter are in principle “contractual” obligations which the contracting parties intend to have only inter partes effect and are therefore not conclusively linked to the share, i. e. when a share is transferred these rights and obligations are not transferred automatically to the transferee, but only upon explicit stipulation in the articles of association or by special agreement. 413 414 415

270

§ 34 GmbHG. § 21 GmbHG. § 27 GmbHG.

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3. The Shareholder

Germany 126

The juxtaposition of shareholder rights and obligations deriving from various sources 126 (GmbHG, articles of association and shareholder resolutions) again allows more flexibility for the business form GmbH than for an AG, in particular since many provisions of the GmbHG are not compulsory. In consequence shareholder rights and obligations can be created individually for each shareholder and depending on the needs of the business carried out. Of course the principle of equal treatment of the shareholders has to be obeyed and discrimination of minorities is not permitted. Nevertheless the shareholder meeting may accept with a qualified majority and the consent of the shareholders who are adversely affected that some rights and obligations apply for particular shareholders only.416 Examples for such preferential rights are: guaranteed minimum profit for one shareholder, increased profit to one shareholder compared to the proportion of his shareholding in the share capital, pre-emptive rights in the liquidation of the company, veto rights, increased voting rights compared to the proportion of the shareholding, exclusive rights to appoint the management or the advisory board. Examples for special obligations are: contribution of additional funds or assets to the company and providing special services to the company. b)

Shareholder Resolutions/Shareholder Meetings

The shareholder meeting is the supreme organ of the company. It has an exceptional 127 significance since a) shareholder rights are exercised in shareholder meetings417 (i. e. fundamental decisions /measures must be decided at the shareholder meeting), and b) managing directors are bound to decisions of the shareholder meeting. A catalogue of fundamental decisions /measures reserved for the shareholder meeting is formulated in § 46 GmbHG: – approval of the annual financial statements and appropriation of results – request to pay up the share capital – repayment of additional payments – partition and redemption of shares – appointment and dismissal of managing directors as well as approval of their conduct of the business – measures to check and supervise management – appointment of holders of general signing powers and of authorized signatories with powers extending to the whole business – asserting claims by the company vis--vis managing directors or shareholders. Shareholder meetings are convened by the managing directors.418 An ordinary share- 128 holder meeting is called once a year adopting resolutions concerning the annual financial statements, distribution of profits and approval of the management. In addition managing directors are obliged to convene a shareholder meeting if the situation of the 416

417 418

Once created, it might become difficult to revoke those rights or obligations so such measures should be considered carefully. § 48 sec. 1 GmbHG. § 49 sec. 1 GmbHG. A shareholder meeting shall be convened by regular mail which must reach the shareholders at least one week before the meeting unless otherwise stipulated in the articles (these rights can be waived for extraordinary meetings).

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Germany

III. The Limited Liability Company – GmbH

company requires it,419 if shareholders holding a total of at least 10 % of the entire share capital so request,420 or if half of the nominal share capital is consumed by loss.421 129 In principle, the shareholder meeting decides by a majority of the votes cast422 and each EUR 50 of a shareholding grants one vote if the articles of association do not provide otherwise.423 A change of the articles of association, however, requires a majority of three quarters of the votes cast.424 Resolutions can be passed outside a shareholder meeting by the vote being cast in writing, e-mail, telephone, facsimile, etc. if the articles of association provide for these means. In principle shareholder resolutions may even be adopted abroad. 425

4.

The GmbH-Share

130 As stated above, the GmbH-shares come to existence in return for the assumption of the original contributions by the shareholders. A GmbH-share has a nominal amount that equals the amount of the contribution assumed by the shareholder.426 The GmbHshare represents all rights and obligations of a shareholder but in general it has no concrete form, i. e. a share certificate or the like is not issued to the shareholder. As a consequence a GmbH does not have to keep a shareholder book. The only document referring to the shareholders is the list of shareholders which has to be submitted to the commercial register (without being published) initially with the formation of the company and subsequently each time the composition of shareholders changes. 427 Of course the articles of association can provide for the granting of share certificates to the shareholders, but nevertheless they would only be deemed as documentary proof but not as proof of ownership. As mentioned above each shareholder may subscribe only for one single share at the formation of the company. 428 Subsequently, however, a shareholder can assume another share, e. g. by means of a capital increase or by acquisition

419 420

421 422 423 424

425

426

427 428

272

§ 49 sec. 2 GmbHG. § 50 sec. 1 GmbHG. If the management does not comply with such a request, the shareholders themselves are entitled to convene the shareholder meeting. § 49 sec. 3 GmbHG. § 47 sec. 1 GmbHG. The articles of association may provide as well for other majorities. § 47 sec. 2 GmbHG. § 53 sec. 2 GmbHG. This is a compulsory provision serving the protection of minority shareholders. N. B.: If shareholder resolutions are adopted permanently outside Germany, the register court may find that the registered office has been transferred abroad which is a reason to liquidate the company. Cf. sec. III.5.a)aa). § 14 GmbHG. Shareholder contribution and GmbH share are therefore two different objects which are of course linked to each other. § 40 GmbHG. § 5 sec. 2 GmbHG.

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4. The GmbH-Share

Germany 131

from a co-shareholder. A split of a share into sub-shares is generally not permitted, except if parts of a share are to be transferred429 or if a share has to be divided among heirs. Precondition for such a measure is the company’s approval430 which is declared by the management. a)

Classes of Shares

Contrary to the Stock Corporation Act the GmbHG does not differentiate between 131 different classes of shares. As mentioned above, the general rules that apply in a GmbH are: “one shareholder, one share” and “equal rights for all shareholders”. Of course the articles of association may grant e. g. preferred rights or special obligations to certain shareholders, but this differentiation has only an internal effect. b)

Transfer of Shares/Legal Requirements/Cost

A peculiarity of German law concerning the transfer of title is the distinction between 132 the contractual obligation to transfer („Verpflichtungsgeschft“)431 and the transfer of title itself („Verfgungsgeschft“). The transfer of a GmbH-share therefore includes both components, too: seller and buyer of a share have to enter into both agreements which can of course be combined and therefore included in one document. Both agreements have to be formally recorded by a notary. 432 Agreements not observing this formal requirement are void and unenforceable. However, if only the contractual obligation does not observe this form, it will become valid and enforceable if the transfer itself is effected in the proper form, i. e. by formally recorded transfer agreement. 433 The agreement can be entered into by proxies on behalf of the parties. In general a written power of attorney is sufficient, i. e. notarisation/authentication of the power of attorney is not requested. The notarisation of the share transfer may take place abroad as long as German notarisation standards are met.434 The advantage of such a notarisation abroad might be to save notarisation fees. The notary fees for a transfer of a GmbH share in Germany depend on the nominal value, the true value or the purchase price, depending on which amount is higher. The articles of association may stipulate further formalities for the transfer of shares,435 133 e. g. the approval of the company, pre-emptive rights, put /call options for (certain) shareholders. If the articles of association provide for the issuance of share certificates,

429 430 431

432 433 434

435

§ 17 sec. 1 GmbHG. § 17 sec. 1 GmbHG. The term contractual obligation has a broad scope and also includes option rights, pre-emptive rights, etc., i. e. the certainty/uncertainty of a subsequent transfer is irrelevant. § 15 sec. 3 and 4 GmbHG. § 15 sec. 4 GmbHG. Commercial registers and courts frequently accept notarizations, which have been completed e. g. in Basle, Zurich or Zug; such measures should, however, be coordinated with the competent commercial register. § 15 sec. 5 GmbHG.

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they may also require that – in addition to the statutory requirements stated above – the respective share certificate has to be presented in the event of an assignment of the shares. 134 After the completion of the share transfer the new shareholder has to notify the company and provide proof of the acquisition of the share(s). 436 This notification is mandatory for the legitimisation of the new shareholder vis--vis the company, e. g. to exercise his rights in shareholder meetings. In practice, the notification is carried out by the notary who has notarised the share transfer agreement and who has been authorized accordingly by a power of attorney. Furthermore, the commercial register has to be informed of the change of shareholders by submission of an updated shareholder list. 437 Neither the submission of the shareholder list to the commercial register nor the notification of the company has relevance towards third parties and the validity of the share transfer. 135 Besides the share transfer by agreement, which is of course the most frequent case for the disposition of shares, inheritance of shares has great relevance both for shareholders and for the company. Continuity of the business and maintenance of a personal structure may be of paramount significance so that the articles of association should contain provisions concerning the inheritance of shares which safeguard these targets by stipulating e. g. transfer obligations for the heirs, regulations for joint shareholding by the heirs and the exercising of rights pertaining thereto. The articles of association cannot, however, exclude the inheritance of shares from a shareholder to the heirs. c)

Own Shares

136 A GmbH can acquire its own shares only if they are fully paid in and the acquisition is made by funds in excess of the amount of the nominal capital of the GmbH. 438 Contrary to a redemption of shares, the shares acquired by the company continue to exist and they can be transferred (or otherwise disposed of) by the company as it would apply for shares in a third company, although administration and property rights pertaining to own shares are dormant.

5.

The Articles of Association

137 The articles of association are the predominant instrument for the interactions in a GmbH and they can be shaped quite flexibly in accordance with the needs of the business and those of the shareholders. Pursuant to § 3 GmbHG only the following provisions are mandatory in the articles of association:

436 437

438

274

§ 16 sec. 1 GmbHG. As pointed out above, there is no formal registration of the shareholders in the commercial register and third parties cannot rely on the correctness of the shareholder list. § 33 GmbHG.

Frank Dornseifer

5. The Articles of Association

a)

Mandatory Content

aa)

Company Name and its Registered Office

Germany 138

The choice of the company name („Firma“) of a GmbH is quite liberal; even fantasy 138 names are admitted. The addendum „Gesellschaft mit beschrnkter Haftung“ or a common abbreviation like „GmbH“ is mandatory in order to guarantee transparency in business regarding the particular business form.439 Restrictions might arise through other laws with respect to the clarification and distinctiveness of the name as well as registered trademarks or unfair competition. The registered office („Sitz“) is the place where the company runs the business; alter- 139 natively the corporate office or the place where the management occurs can be determined in the articles of association as the registered office.440 The choice of the registered office determines the competent commercial register where the GmbH will be registered. The registered office may not be outside Germany, neither at formation nor by changing the seat.441 bb) Business Object

A GmbH can be established for any legitimate business object (“Unternehmensgegen- 140 stand”). The description of such object must be reasonably precise and not too vague; however, deviations in the factual business object from the formal business objective have only a minor impact on the business itself since German law does not apply the “ultra vires doctrine”. cc)

Share Capital and Amount of Shareholder Contributions

As stated above the requested minimum share capital of a GmbH amounts to EUR 141 25,000,442 the minimum amount of the contributions of each shareholder is EUR 100, and any higher nominal amount for contributions must be divisible by EUR 50, and contributions may be of different amounts for each shareholder.443 The nominal amount of each shareholder contribution reflects the proportional participation of a shareholder in the company and does not in general show the value of the share. The shareholder contributions have to remain at the GmbH’s disposition and a distribution to the shareholders is prohibited.444

439 440 441

442

443 444

§ 4 GmbHG. § 4 a GmbHG. Pursuant to corporate income tax law a change of seat from Germany to abroad is equivalent to a liquidation of the company which triggers taxation of hidden reserves, etc. The legality of the corresponding provision is very questionable with respect to EU law and recent case law. However, it might be reduced to a minimum amount of EUR 25,000 with effect as of 01/01/2006. § 5 sec. 1 and 3 GmbHG. § 30 sec. 1 GmbHG.

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b)

Additional Provisions of the Articles of Association

III. The Limited Liability Company – GmbH

142 Beyond the aforementioned mandatory provisions the GmbHG offers to shareholders great discretion in setting up regulations for the functioning of the GmbH. Thus the articles of association frequently include additional provisions referring to the following issues, for example: – fiscal / business year – rights and obligations of managing directors – financial reporting /audit requirements – competence of the shareholder meeting (in addition to the mandatory provisions of the GmbHG) – transfer of shares – joining and leaving of shareholders – establishment and composition of an advisory board – distribution of profits, etc. 143 Only if the articles of association do not contain further provisions are the matters related to the GmbH governed by the GmbHG. c)

Amendment of the Articles of Association

144 With respect to the significance of the articles of association their amendment has to follow quite a formal procedure: aa)

Formally Recorded Shareholder Resolutions

145 As the initial articles of association have been adopted by the (founding) shareholders in a shareholder resolution, any amendment of the articles of association is effected in this forum too.445 Shareholder resolutions do not in general require a particular form and are adopted by the majority of votes cast; a shareholder resolution amending the articles of association, however, has to be formally recorded by a notary and requires a majority of three quarters of the votes cast446 whereas the articles of association can even impose additional requirements,447 e. g. a greater majority or unanimity or the consent of specific shareholders. The imposing of additional requirements, however, is subject to some restrictions: the majority for resolutions amending the articles of association cannot be reduced below three quarters of the votes; an increase of obligations assumed by the shareholders under the articles of association requires the approval of all the shareholders affected; granting and revocation of preferential rights to some shareholders requires the consent of those shareholders who are adversely affected, etc. The mandatory notarization of the amendment serves to draw the attention of the shareholders to the significance as well the consequences of the amendment of the articles of association. Since the notary is an independent office bearer and as such part of the legal system, he has the duty to review the legality of the intended measure and to instruct the parties objectively. 445 446 447

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§ 53 sec. 1 GmbHG. § 53 sec. 2 GmbHG. § 53 sec. 2 GmbHG.

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Germany 146

bb) Registration with the Commercial Register

Any amendment of the articles of association has to be applied for registration with the 146 commercial register,448 i. e. the fact that the articles of association have been amended must be registered with the commercial register. In addition, amendments concerning details shown in the extract of the commercial register require a rectification of the respective entry in the commercial register449 and they have to be published in the official papers.450 The application has to be furnished with the complete text of the amended articles of association and it must contain the affidavit of the certifying notary that a) the amended provisions correspond to the accompanying resolution and b) that the unchanged provisions correspond to the complete text of the articles of association as last submitted to the commercial register. 451 The application has to be signed by the managing directors in the required number (depending on the power of representation)452 and their signatures have to be authenticated by a notary. Representation by proxies is permitted if the power of attorney itself observes the notarial form (authentication) pursuant to § 12 HGB. Apart from the purpose of maintaining the correctness of the commercial register the registration is a precondition for the amendment becoming effective. 453 Of course the shareholders are bound among themselves to the relevant corporate act of the shareholder resolution upon its adoption unless they agree that they are bound only upon its registration. d)

Capital Increase/Decrease

The GmbHG offers a number of different types of capital measures as:454 – ”ordinary” share capital increase – increase of share capital from company reserves – ”ordinary” share capital decrease – simplified decrease of the share capital – combination of share capital increase and decrease

147

The increase and the decrease of the share capital are special types of an amendment of 148 the articles of association and consequently the procedure described above (notarial shareholder resolution with a majority of three quarters, application for and registration with the commercial register, publication, etc.) has to be observed. Additional formalities shall be described in the following related to the respective capital measures:

448 449

450

451

452

453 454

§ 54 sec. 1 GmbHG. § 54 sec. 2 GmbHG N. B.: Replaced entries in the register are underlined, new entries are placed below. § 54 sec. 2 GmbHG N. B.: The publication is only declaratory, but can be asserted against a third party. § 54 sec. 1 GmbHG N. B.: the application is again subject to review by the competent register court, § 9 c GmbHG. N. B.: Certain amendments, e. g. capital measures, require application by all managing directors, § 78 GmbHG. § 54 sec. 3 GmbHG. The term “ordinary” is used in the following to refer to the standard capital increase /decrease.

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III. The Limited Liability Company – GmbH

149 a) The ordinary share capital increase is carried out through additional contributions in cash or kind from existing shareholders or third parties intending to become shareholders. The company may therefore allow subscriptions to share capital contributions from these persons who, upon assumption of the contribution, declare their membership in the company.455 Shareholders /third parties have to make contributions to the company in the amount of the intended increase and they have to subscribe (by subscription statement, notarized or authenticated by a notary) for new shares in that amount.456 Similar to the formation the amount of the contributions may be different for each (new) shareholder; it must be divisible by EUR 50 and may not be less than EUR 100.457 The requested payments for the new shares are also subject to the same restrictions as for the formation, i. e. minimum payments, liability for shortfall, etc. If contributions in kind are to be made the evaluation of the assets has to be accurate and the value has to be approved by an auditor (which causes additional costs). If the value stated in the resolution is not met, the transferor /shareholder is personally liable for the difference.458 The problem frequently arises that a capital increase by a contribution in cash is carried out to acquire subsequently goods from the contributor, so that the capital increase is in fact a capital increase in kind (so-called „verdeckte Sacheinlage“). 459 Such a transaction is void and the contribution in cash has to be paid again. 150 Regarding the registration formalities it should be noted that the application has to be accompanied by originals or certified copies of the subscription statements, a list of the subscribers including name, profession and domicile as well as the amount of the share capital subscription and further documentation concerning non-cash contributions. 460 In addition – if contributions have been made – the managing directors have to give the necessary assurances to the commercial register (similar to the formation) that the contributions have been made available to the company and are at the managing directors’ disposal.461 151 b) An increase of the share capital solely in favour of existing shareholders but without additional contributions from them (i. e. without the procedure of subscription, payment, etc.) is the increase of the share capital from company reserves, a conversion of free reserves („freie Rcklagen“) of the company into share capital. 462 A precondition for such an increase of the share capital is that the reserves have been recorded as free reserves in the latest balance sheet (that has been audited and approved and must not be older than 8 months).463 Furthermore the financial statements for the last completed financial year prior to the resolution concerning the capital increase must have been 455 456

457 458 459 460 461 462 463

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§ 55 sec. 2 GmbHG. Instead of issuing a new share to existing shareholders the amount of their share can be increased. § 55 sec. 4 and § 5 GmbHG. § 56 sec. 2 and § 9, § 19 sec. 5 GmbHG. This way is often chosen to circumvent the various restrictions for a capital increase in kind. § 57 sec. 3 GmbHG. § 57 sec. 2 GmbHG. § 57 c GmbHG. § 57 d GmbHG.

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adopted and the results distributed.464 Like the normal share capital increase this increase can be carried out by an increase of the existing shares or the issuance of new shares or a combination thereof. The shareholders automatically become the owners of the new shares; no subscription is necessary. c) With regard to the share capital decrease the GmbHG differentiates between the 152 ordinary and the simplified share capital decrease. Whereas the simplified share capital decrease465 basically refers to cases in which shareholders intend to compensate reductions in value or to cover losses of the company – elimination of a capital deficit –, the ordinary share capital decrease466 can be utilized for the following situations: to repay the original shareholder contributions, to waive claims for payment of amounts due on the original shareholder contribution or, to compensate a leaving shareholder (if his share has been redeemed). With respect to the guarantee function of the registered share capital which is explicitly stipulated in § 30 GmbHG (company assets required to preserve the share capital may not be distributed to the shareholders), a capital decrease is subject to many formalities which focus on the protection of creditor rights; in particular the decreased share capital must not be below the minimum amount of EUR 25,000. In detail the formalities are different for the ordinary and the simplified share capital decrease. The following restrictions467 apply for the ordinary share capital decrease: – notification of the creditors, i. e. the resolution concerning the capital decrease must be published by the managing directors on three different occasions in the public papers stipulated in the articles of association/GmbHG; in addition creditors of the company have to be requested (with the aforementioned publication or by separate notice) to report their claims to the company; – securing of creditors, i. e. creditors who notify the company and who do not approve the capital decrease shall be satisfied or secured with respect to their claims; – one-year waiting period, i. e. the capital decrease may not be applied for registration until one year after the third publication; – confirmation of managing directors, i. e. the application to the commercial register has to include the publications and the confirmation of the managing directors that the creditors who did not approve the capital decrease have been satisfied or secured. For the simplified share capital decrease these restrictions do not have to be observed. As 153 this procedure is mainly used in a financial crisis of a company the observance of these requirements might obstruct consolidation measures. In practice the simplified share capital decrease is often carried out with a subsequent share capital increase since the simple cover of losses does not suffice and a company requires fresh equity. Nevertheless, the rights of creditors have to be taken into account in the simplified procedure and therefore it is also subject to some restrictions:468 464 465 466 467 468

§ 57 c sec. 2 GmbHG. § 58 a GmbHG. § 58 GmbHG. § 58 sec. 1 no. 1-4 GmbHG. § 58 a-d GmbHG.

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III. The Limited Liability Company – GmbH

– the simplified share capital decrease is permissible only after the portion of the capital reserves and profit reserves, which together exceed 10 % of the share capital remaining after the decrease, is eliminated; it is not permissible as long as there exists a profit to carry forward; – the amounts that are made available from such elimination and from the capital decrease may only be used to compensate reductions in value and to cover other losses or to some extent they may be added to the capital reserve; – an amount added to the capital reserve pursuant to these provisions may not be distributed to shareholders for a period of five years; – if it turns out later that reductions in value and other losses did not actually occur to the extent presumed when the resolution was passed or they were compensated, then the difference shall also be added to the capital reserve; – the distribution of future profits has to observe some material and time limitations.

6.

Management Board

a)

Managing Directors

154 Managing directors are the statutory representatives of a GmbH. A GmbH must have at least one managing director.469 Only natural persons (i. e. no legal entities) with full capacity are eligible to become managing directors and they have to be personally reliable,470 i. e. individuals convicted of certain criminal bankruptcy offences are precluded. Non-shareholders as well as shareholders may be appointed as managing directors.471 The articles of association can of course provide for further preconditions to be met by the designated managing directors and also stipulate a minimum/maximum number of managing directors.472 In general there are no restrictions regarding their nationality, but some register courts request a permanent residence in the EU. If the managing director(s) is /are prohibited from entering into Germany, the court may argue that the corporate office/management is outside of Germany and therefore may deny registration. 155 Managing Directors are appointed and removed by a resolution of the shareholder meeting,473 but this competence can also be delegated to another body or person but not to the management itself. If a GmbH has more than 2000 employees and is therefore subject to co-determination of employees, managing directors are appointed by the mandatory supervisory board;474 in addition, a labour relations director has to be appointed.475 The appointment of a managing director is a corporate act different from the conclusion of the employment contract between the GmbH and the managing director. 469 470 471 472 473 474 475

280

§ 6 sec. 1 GmbHG. § 6 sec. 2 GmbHG. § 6 sec. 3 GmbHG. § 6 sec. 4 GmbHG. § 46 no. 5 GmbHG. § 31 Co-Determination Act („Mitbestimmungsgesetz“, „MitbestG“) and § 84 AktG. § 33 MitbestG.

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Germany 156

In consequence the removal of a managing director does not automatically lead to the termination of the employment contract.476 Unlike the management of a stock corporation managing directors of a GmbH can be revoked at any time.477 The appointment /removal of managing directors has to be applied for registration with the commercial register.478 Newly appointed managing directors can themselves file the application concerning their appointment. Removed managing directors can file the application concerning their removal only if the removal comes into effect on a date later than the filing of the application. In general appointment/removal becomes effective once the shareholder resolution is adopted, not upon registration with the commercial register. Nevertheless the appointment /removal can be made under the condition of registration, but this might not be desirable since the date of registration will be uncertain. Regarding the registration of the appointment /removal of managing directors with the commercial register it is also important to consider that third parties rely on the publication in the commercial register; therefore, if the appointment /removal of a managing director is not yet registered, the company cannot deny the fact towards third parties.479 In consequence a company could be bound by any legal transaction entered into by a former managing director who has not been erased from the commercial register. The only exception from this rule is the third party’s knowledge of the true facts. Apart from the revocation a managing director himself can resign from his function 156 with a unilateral declaration. The declaration has to be addressed to the body which carries out the appointment, i. e. in most cases the shareholder meeting. The resignation becomes effective upon receipt by the respective body.480 Whereas the appointment is the corporate act of becoming managing director, the 157 service agreement – to be entered into between the shareholders (on behalf of the company) and the managing director – is the legal act of determining the services to be rendered by the managing director. Since a managing director cannot be regarded as an employee in the strict sense and the rules protecting employees in German labour law do not therefore in principle apply, the service agreement nevertheless contains the typical elements of an ordinary employment contract (duration, compensation, vacation, etc.). As the removal of a managing director does not affect the service agreement, termination of the service agreement thus requires an explicit declaration by the shareholders, too.

476

477 478 479 480

N. B.: A removed managing director might still be entitled to receive his remuneration, § 38 sec. 1 GmbHG. § 38 sec. 1 GmbHG. § 39 GmbHG. § 15 sec. 1 HGB. Under certain circumstances a resignation may be deemed as an abuse of rights or violation of the service agreement and therefore be void or create a claim for damages against the managing director.

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Germany

b)

Management and Representation

III. The Limited Liability Company – GmbH

158 As mentioned above managing directors are the statutory representatives of a GmbH. Under German corporate law the term “representation” includes two elements: management („Geschftsfhrung“) on the one hand and representation („Vertretung“) on the other hand. Both terms describe basically the same acts and measures of the managing directors, however from a different perspective: management refers to the internal allocation and scope of powers (i. e. the acting of the managing director(s) as internally permitted) whereas representation refers to the allocation and scope of powers for acts and measures with third parties (i. e. the acting of the managing director(s) and the legal effect vis--vis third parties). 481 Internal limitations, e. g. by a catalogue of business transactions, which require approval of the shareholder meeting are common482 and permitted; they have no effect on third parties,483 however, and an infringement of such internal regulations does not mean that respective transactions are void. Pursuant to the general rule of the GmbHG management and representation are carried out either by the managing director alone if the company has only one managing director, or by all managing directors jointly if several managing directors have been appointed. 484 The shareholders can of course agree on other forms of representation by: – granting sole power of representation to one or several managing directors – granting joint power of representation to one or several managing directors in conjunction with another managing director, i. e. not all (if more than two) managing directors have to represent the GmbH; – granting joint power of representation to one or several managing directors in conjunction with a registered officer holding general signing power.485 c)

Responsibilities and Personal Liability of Managing Directors

159 The responsibility of a managing director is determined by a hierarchic system of applicable laws, the articles of association, the service agreement and shareholder instructions. Some provisions, e. g. in the GmbHG, regarding responsibilities of managing directors are mandatory and the articles of association and the service agreement may therefore not deviate from them; outside these mandatory provisions, however, shareholders have great flexibility to determine the responsibilities of their managing directors. The fundamental responsibility for managing directors as stated in § 43 sec. 1 GmbHG is to observe the due care of a prudent businessman. Additional main responsibilities486 for managing directors are:

481

482

483 484 485 486

282

Most acts of the managing directors concern both management and representation, however, some internal measures, record keeping e. g., only concern management. Such catalogue can be agreed on by a simple shareholder resolution or can be included in the articles of association, the latter having the disadvantage that amendments are subject to the formalities described in sec. III.5.c). § 37 GmbHG. § 35 sec. 2 GmbHG. Cf. sec. III.6.d) below concerning the term „Prokura“. These responsibilities are partially stated in the GmbHG, partially developed by jurisdiction.

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Germany 160

– observance of and compliance with the legal requirements at the formation, i. e. payment of shareholder contributions, making correct statements to the commercial register, etc.; – filing applications with the commercial register; – ensuring that the company maintains proper accounting records; – preservation of the share capital; – ensuring that the company does not acquire own shares contrary to § 33 GmbHG; – convening shareholder meetings; – petition for the commencement of insolvency proceedings if the company becomes insolvent or if the assets of the company no longer cover the liabilities; – obligation to report to the shareholders a loss of half of the share capital; – duty to maintain secrecy; – duty not to compete with the company; – proper payment of taxes and social security contributions. Corresponding to the level of hierarchy the sanctions for a violation of these respon- 160 sibilities may have different severity. Possible sanctions are: administrative or criminal penalties, imposition of fines by court or governmental authorities, claims for damages, dismissal of a managing director for cause. d)

Other Representatives of a GmbH

Similar to an AG487 a GmbH may have in addition to the managing directors e. g. 161 registered officers holding general signing powers488 („Prokuristen“) and authorized signatories489 („Handlungsbevollmchtigte“). These representatives are appointed and revoked by the managing directors on the basis of a shareholder resolution.490

7.

Supervisory Board

a)

Mandatory/Optional Supervisory Board

As described above the typical GmbH has a two-tier organ structure and therefore no 162 supervisory board.491 A GmbH, however, can provide in the articles of association for the establishment of an optional supervisory board or – if the company has a certain number of employees and is therefore subject to the laws pertaining to co-determination of employees – it is obliged to establish a mandatory supervisory board. The laws pertaining to labour participation are i. a.492 the “Law Pertaining the one-third Parti487 488 489 490 491

492

Cf. sec. II.6.d). § 48 et seq. HGB; Prokuristen have to be registered with the commercial register. § 54 HGB. § 46 no. 7 GmbHG. Traditionally the GmbHG does not contain material provisions concerning a supervisory board. Cf. sec. II.7.b) N. B. Certain companies of the coal and steel industry are also obliged to establish a supervisory board, but they are rarely incorporated as a GmbH.

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163

Germany

III. The Limited Liability Company – GmbH

cipation of Employees in Supervisory Boards” for companies with more than 500 employees and the “Co-Determination Act of 1976” for companies with more than 2000 employees.493 If an optional supervisory board is established, it is governed by certain provisions of the Stock Corporation Act concerning the supervisory board of the AG494 unless the articles of association do not exclude these provisions and contain explicit own regulations for the supervisory board. If the GmbH is subject to labour participation, the applicable laws mentioned above determine the respective provisions of the AktG which are mandatory for the supervisory board495 and the articles of association may not deviate thereof. Supervisory boards established pursuant to these laws consist of employee representatives and shareholder representatives. 163 The establishment of a supervisory board itself and the identity of each member do not have to be published in the commercial register. This information has to be published in the Federal Gazette, however, and – if provided for in the articles of association – in other public papers and those publications in turn have to be submitted to the commercial register. 496 b)

Composition and Responsibilities of the Supervisory Board

164 The composition and electoral procedure for the members of an optional supervisory board can be freely determined. Also, the general rule of § 95 AktG that a supervisory board has three members, only applies if the articles of association do not provide otherwise. The same applies for the scope and powers of the supervisory board, although minimum standards pursuant to the AktG497 have to be observed. The main functions and rights of the supervisory board are:498 – supervision of the management (including the right to request a report on the affairs of the company); – inspection/examination of the company books, records and assets; – convening shareholder meetings if the affairs of the company require; – representation of the company towards managing directors. 165 Sometimes the supervisory board is even entitled to appoint /revoke managing directors and to adopt the annual financial statements and the articles of association may provide that fundamental business decisions by the management are subject to approval by the supervisory board. The members of the supervisory board are generally appointed by shareholder resolution; the articles of association can provide for a different procedure, however, and grant special rights to certain shareholders in the ap493

494

495 496 497 498

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”Employees” might include under certain circumstances those of affiliated companies or group companies which can increase the number significantly and therefore require the establishment of a supervisory board. § 52 sec. 1 GmbHG enumerates the applicable provisions of the AktG concerning the supervisory board. § 1 DrittelbG, §§ 6, 25 MitbestG 1976. § 52 sec. 2 GmbHG. Cf. § 90, § 111 AktG. Cf. § 111 AktG.

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7. Supervisory Board

Germany 166

pointment procedure like, e. g. a nomination right. The term of office for the members of the optional supervisory board of a GmbH is in principle unlimited so that the articles of association or a shareholder resolution should stipulate the term of office and/or the procedure of revocation to give certainty. The articles of association should further contain provisions regarding the resignation of members of the supervisory board; otherwise they can resign at any time. The revocation procedure for members of the supervisory board generally follows the provisions of the AktG499 if the articles of association do not deviate therefrom. Members of a supervisory board (optional or mandatory) generally receive a remuneration for their activities which is either determined in the articles of association or in a shareholder resolution and which shall be reasonable with respect to the effort of the members and the situation of the company.500 Apart from these general aspects the following particularities deriving from the laws 166 pertaining to labour participation have to be considered:501 – The supervisory board of a GmbH underlying the Law Pertaining to the OneThird Participation of Employees in Supervisory Boards (i. e. more than 500 employees) must have at least 3 members, the articles of association may stipulate for more members (maximum 21 members), but the number must be divisible by three and one third of the members of the supervisory board have to be employee representatives. The Act contains separate provisions for the election and removal of the employee representatives whereas appointment and removal of shareholder representatives is left to the shareholders. The supervisory board has a strong position regarding control of the management and can even convene shareholder meetings. The articles of association can delegate further rights to the board but not the appointment /removal of managing directors. In addition the supervisory board is entitled to review (but not to veto or to approve) the annual financial statements. – The supervisory board of a GmbH underlying the Co-Determination Act 1976 (i. e. more than 2000 employees) must have 12, 16 or 20 members, depending on the number of employees of the company: one half are shareholder representatives and the other half are employee representatives; the latter are elected and removed by the employees. Contrary to the Law Pertaining to the One-Third Participation of Employees in Supervisory Boards the supervisory board appoints /revokes the management. The chairman of the supervisory board is usually provided by the shareholder side and has the decisive vote in case of equal votes. – The term of office is generally limited to 5 years, but a prolongation is possible.

499

500

501

§ 103 AktG. N. B.: In consequence, removal of members of the supervisory board prior to the end of their term of office is possible. Cf. § 113 AktG. If no remuneration is granted, they are entitled to have their expenditures compensated. For details see § 6-29 MitbestG 1976 and §§ 1-12 DrittelbG.

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Germany

c)

Qualifications

III. The Limited Liability Company – GmbH

167 Regarding qualifications of members of a supervisory board the same principles as for a supervisory board of an AG apply.502 d)

Consultative/Advisory Council

168 Alternatively or even in addition to the supervisory board some companies have socalled consultative or advisory councils („Beirat“) which have a similar function to the supervisory board or which can be endowed with special (even managerial) rights. Such councils may be established to create a board system similar to the Anglo-American one.

8.

Selected Capitalisation and Liability Questions Concerning the GmbH

a)

Prohibition of Repayment of Shareholder Contributions

169 The principle of contribution and maintenance of the share capital applies for a GmbH in the same way as for an AG.503 The company’s assets may therefore not be distributed to shareholders if the value of the company’s equity would be reduced below the amount of the nominal capital by this.504 Payments to shareholders contrary to this stipulation must be repaid to the company505 and even co-shareholders and managing directors may be liable for the repayment.506 b)

Capital-Substituting Loans

170 In general, there is no distinction between loans from third parties and shareholder loans. A shareholder as a lender has the same rights and obligations as any third party. However, this principle does not apply if a loan from a shareholder is deemed to be a capital-substituting loan („eigenkapitalersetzendes Darlehen“). A shareholder loan is deemed to be a capital-substituting loan if the shareholder makes a loan to the company at a time when shareholders acting as orderly merchants would have instead provided capital to the company.507 In this case several restrictions apply:508 the shareholder providing a capital-substituting loan may not claim the repayment of the loan during bankruptcy proceedings or composition proceedings to avoid bankruptcy.509 Other legal 502 503 504

505 506 507 508

509

286

Cf. sec. II.7.c). Cf. sec. II.8.a). § 30 sec. 1 GmbHG; regarding additional payments („Nachschsse“) § 30 sec. 2 GmbHG allows the distribution to shareholders to some extent. § 31 sec. 1 GmbHG. § 31 sec. 3 and 6 GmbHG. § 32a sec. 1 GmbHG. These restrictions are stipulated in § 32 a, § 32 b GmbHG, but have been made more concrete by various judgements of the Federal Court of Justice. § 32 a sec. 1 GmbHG.

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Germany 171

acts of a shareholder that correspond to the granting of a loan are treated in the same manner.510 Not only the shareholder himself but a third party (lender) might also be restricted from claiming the repayment of a loan granted if a shareholder has provided a security or assumed a guarantee for the repayment of the loan to the lender.511 In addition to these restrictions a shareholder might even be obliged to refund the repayment to the company or to provide the company with the securities given if a capitalsubstituting loan has been repaid within one year preceding the commencement of insolvency proceedings.512 Besides these regulations the Insolvency Code („Insolvenzordnung“) and related laws provide for further means to demand the refund of loan repayments to shareholders or third parties in case of insolvency. c)

Liability Risks in the Context of Insolvency

If the company becomes insolvent each managing director shall without undue delay, 171 but not later than three weeks after the insolvency occurs, petition for the commencement of insolvency proceedings;513 the same applies in case of over-indebtedness, i. e. if the assets of the company no longer cover the liabilities.514 Managing Directors failing to comply with this obligation (by negligence or by intention) are liable to compensate the company for any payments made after insolvency has occurred or over-indebtedness is discovered.515 In addition, Managing Directors may be liable towards single creditors for violation of a protective law.

9.

Financial Reporting/Audit and Disclosure Requirements

a)

Financial Reporting

Like the AG, a GmbH is deemed to be a merchant by operation of law and therefore 172 obliged – pursuant to § 238 HGB – to keep books and records in order to show clearly the commercial transactions and the financial position of the business under observance of generally accepted accounting principles („Grundstze ordnungsgemßer Buchfhrung“). The managing directors (individually) have the duty to ensure that the com-

510 511

512 513 514

515

§ 32 a sec. 3 GmbHG. § 32 a sec. 2 GmbHG; in these cases the lender has to claim compensation from the shareholder first. § 32 b GmbHG. § 64 sec. 1 GmbHG. The determination of over-indebtedness follows in principle a two-step procedure examining the chances of the company to survive followed by the setting up of a balance sheet considering the assets once with their liquidation value and once with their current value (the details of this procedure are quite complex and disputed and thus shall not be further discussed). § 64 sec. 2 GmbHG; payments consistent with the due care of a prudent businessman are exempted.

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Germany

III. The Limited Liability Company – GmbH

pany maintains proper accounting records.516 Further documentation517 to be prepared is: balance sheet, profit and loss statement, notes and the management report (for certain companies only).518 After the preparation of the financial statements (i. e. balance sheet, profit and loss statement and notes) and the management report, the managing directors have to submit them without delay to the shareholders for approval;519 if the financial statements have to be examined by auditors, the managing directors must submit the respective documents including the auditors’ report to the shareholders without delay after receipt of the auditors’ report; if a supervisory board is established, the board in addition reports on the results of their review and this report has to be submitted to the shareholders without delay as well. 173 The shareholders have to adopt a resolution concerning the approval of the financial statements and the distribution of profits within the first eight (8) months of the fiscal year.520 b)

Audit Requirements/Disclosure

174 Concerning audit and disclosure requirements a GmbH is subject to the same provisions as an AG is.521

10. Taxation 175 A GmbH is subject to the same tax regime as an AG. Thus, the taxation section concerning the AG applies correspondingly to the GmbH.522

11. Dissolution of a Company/Termination of the Business 176 Reasons for and the procedure of dissolving a GmbH are parallel to those for an AG:523 Expiration of the time designated in the articles of association, resolution of the shareholders, court judgement or decision of an administrative court or administrative authority, commencement of insolvency proceedings and final ruling of the registration court which determines that there is a defect in the articles of association or that the obligations under § 19 sec. 4 GmbHG (sole shareholder) have not been complied with are the reasons for a dissolution.524 516 517 518

519 520 521 522 523 524

288

§ 41 GmbHG. § 264 and § 242 HGB. For further details, in particular specific requirements for small, medium-sized and large corporations /companies, cf. sec. II.9.a) above. § 42 a sec. 2 GmbHG. § 42 a sec. 3 GmbHG; the period is prolonged to 11 months for small corporations. Cf. sec. II.9.b) above. Cf. sec. II.10. above. Cf. sec. II.11. above. § 60 GmbHG; the articles of association can of course state further reasons for dissolution.

Frank Dornseifer

11. Dissolution of a Company/Termination of the Business

Germany 177

The dissolution of the company must be filed by the representatives for entry in the 177 commercial register stating the date and the reason for the dissolution525 and – if appointed – the liquidators.526 Together with the application the representatives have to submit proof of the dissolution which is normally the original or certified copy of the shareholder resolution concerning the dissolution of the company. The dissolution must be published by the liquidators in the designated public papers (Federal Gazette, etc) on three separate occasion.527 By this public notice creditors are simultaneously requested to register with the company, i. e. to document any claims against the company. Apart from the publication in the public papers the competent court of the commercial register must publish ex officio the registration of the dissolution.528 Contrary to an amendment of the articles of association, the registration with the commercial register is not a precondition for the dissolution to become effective: the adoption of the respective shareholder resolution is the initial act for the effectiveness. Only the publication in public papers has a particular function since the liquidation may at the earliest be completed one year after the day on which the third notification to creditors has appeared in the public papers.529 The fact that a company is in the process of liquidation has to be documented towards third parties by adding to the company name the term “in liquidation” or a common abbreviation as “i. L.”.530 The liquidators shall wind up current transactions, fulfil obligations of the dissolved 178 company, collect outstanding claims, realise the assets of the company and finally distribute the liquidation proceeds to the shareholders.531 They have to prepare an opening and final balance sheet,532 which have to be approved by a shareholder resolution and audited.533 As mentioned above the final act of the liquidation, the distribution of the liquidation 179 proceeds depends on the passing of the waiting period of one year after the date when the third notification to creditors was published in the public papers and all liabilities of the company have to be paid or secured.534 The assets of the company are then distributed (in cash if not provided or resolved otherwise) to the shareholders pro rata to 525

526

527 528 529 530 531 532 533

534

§ 65 sec. 1 GmbHG; the court itself must register ex officio the dissolution and the cause for it in particular cases (insolvency proceeding, ruling of the registration court). § 67 GmbHG. Within the liquidation so-called liquidators who are either the former managing directors or appointed third persons take over the rights and obligations of the management, § 66, § 68 GmbHG. Only in the event of insolvency proceedings management /representation is dedicated to a specialized insolvency administrator. § 65 sec. 2 GmbHG. § 10 HGB. § 73 sec. 1 GmbHG. § 68 sec. 2 GmbHG. § 70 GmbHG. Cf. § 71 GmbHG and sec. II.11. above. If the situation of the company is very apparent, the company can be released from the audit requirement, § 71 sec. 2 and 3 GmbHG. Apart from the approval of the balance sheets the shareholders have to approve the management by the liquidators. § 73 GmbHG.

Frank Dornseifer

289

180

Germany

III. The Limited Liability Company – GmbH

their shares unless the articles of association provide otherwise.535 If the liquidation has been completed and the final accounts have been drawn up, the liquidators shall apply for the registration of the completion of the liquidation with the commercial register.536 The company will then be deleted in the commercial register and ceases to exist. Upon completion of the liquidation the company’s books and records shall be handed to a shareholder or third party who must retain them for ten years to enable shareholders (without restrictions) and creditors (partially, i. e. when authorized by a court) to inspect them.537

12. GmbH & Co. KG 180 Besides the popularity of the business form GmbH itself the GmbH is often utilized as a corporate partner (with limited liability) in partnerships, which allows to some extent the combination of elements of a partnership with elements of a corporation. The most common form of such a partnership is the so-called „GmbH & Co. KG“ (Limited Partnership with a Limited Liability Company as General Partner). The basis of a GmbH & Co. KG is a typical limited partnership („Kommanditgesellschaft“, „KG”).538 The latter is a business enterprise by at least two partners under a joint partnership name, in which the liability of one or more of the partners is limited (to a fixed amount) with respect to the partnership’s creditors, so-called limited partners („Kommanditisten“), and the other partners have an unlimited liability, so-called general partners („Komplementre“).539 The limited partners are liable to the partnership’s creditors up to the amount of their capital contribution which is registered with the commercial register.540 If the capital contributions have been fully paid in, the limited partners are not subject to any further liability.541 Qua definitionem the general partners – in contrast to the limited partners – have an unlimited liability.542 This general rule applies for a GmbH & Co. KG as well; since a GmbH enjoys limited liability, however, the unlimited liability of the general partner is limited to the assets of the GmbH.543 181 The hybrid structure of the GmbH & Co. KG – limited partnership on the one hand and GmbH on the other hand – has an effect on the legal affairs of the company. A 535 536 537 538

539

540 541 542 543

290

§ 72 GmbHG. § 74 sec. 1 GmbHG. § 74 sec. 2 and 3 GmbHG. Cf. sec. I.1.b). The KG is an adaptation of the general partnership in which all partners have an unlimited liability. The provisions governing the OHG apply to the KG with some modifications, § 161 sec. 2 HGB. In addition the rules of the Civil Code on non-commercial partnerships apply, § 105 HGB. The statute governing (limited) partnerships is the Commercial Code and to some extent the Civil Code. § 162 HGB. § 171 sec. 1 HGB. § 161 sec. 1 HGB. Besides the possibility to limit the liability of a general partner, tax aspects might make the GmbH & Co. KG a useful vehicle to carry out business.

Frank Dornseifer

12. GmbH & Co. KG

Germany 182

GmbH & Co. KG as a limited partnership does not constitute a legal entity with its own (separate) legal personality as the GmbH does; like any commercial partnership, however, it does have the status of a “quasi legal entity”, which means that the commercial partnership itself can, under its company name, acquire rights, the ownership and other rights in real property, enter into obligations and furthermore has the ability to sue and be sued in court.544 The GmbH & Co. KG itself is therefore a holder of rights and obligations; management (internally) and representation (to third parties) are, however, carried out by the GmbH (represented by its managing director(s)) in its function as the general partner.545 With respect to the structure of a GmbH & Co. KG it should be noted that the limited partners of the partnership (KG) are frequently also the shareholders of the GmbH. This particular structure is called „Einheitsgesellschaft“. It grants full control over the business of the GmbH & Co. KG to the limited partners in their function as shareholders of the managing GmbH even they are excluded from management and representation in the KG.546 As a consequence of the participation of a GmbH in the legal form GmbH & Co. KG, certain rules and principles of the GmbH also apply for the GmbH & Co. KG. Thus provisions deriving from the GmbHG concerning the protection of creditors, insolvency and over-indebtedness have to be considered as well.547 In principle the provisions concerning labour participation in the management also apply; contrary to the GmbH, however, a supervisory board must be established only if the number of employees exceeds 2,000.548 a)

Formation/Constitution

As stated above the GmbH & Co. KG is a limited partnership. Thus apart from the 182 formation formalities concerning a GmbH the formalities for the formation of a limited partnership have to be observed. Contrary to those for the GmbH the formation formalities for a partnership are quite simple. A partnership is formed by the execution of a partnership agreement between the general and the limited partner. Such agreement does not – contrary to the articles of association of a GmbH – have to be notarized; even an oral partnership agreement would suffice but it is advisable to observe the written form for evidence purposes. In consequence even the change of the partnership agreement does not require a particular form which makes the constitution of a limited partnership quite flexible.549 The partnership agreement is the legal frame that governs the legal relationship (rights and duties) of the partners among themselves 544 545

546 547 548

549

§ 124, § 161 sec. 2 HGB. Limited partners are excluded from the management, but can object to measures of the general partner in specific cases, § 164 HGB. They have the right to inspect the affairs of the partnership, § 166 HGB. N. B.: In both functions their liability is still limited. Cf. § 172 a, § 177 a HGB. For a GmbH & Co. KG a mandatory supervisory board has either 12, 16 or 20 members, 50 % thereof have to be labour representatives. Only fundamental amendments of the partnership agreement have to be applied for registration with the commercial register such as the alteration of the company name, the registered office, the partners § 107, § 161 sec. 2 HGB or the capital contributions of the limited partners, § 174, § 175 HGB.

Frank Dornseifer

291

183

Germany

III. The Limited Liability Company – GmbH

and the partners have a very broad digression to draft and structure it. The provisions of the Commercial Code (e. g. concerning reimbursement of expenses and losses,550 adoption of partner resolutions,551 distribution of profits and losses552 or, withdrawal of funds553) only apply if the partnership agreement does not provide otherwise.554 Thus, in order to form a GmbH & Co. KG a GmbH can either enter directly into a partnership agreement with one or more limited partners or it may acquire the interest of a general partner in an existing limited partnership. In both cases, however, the GmbH has to transfer its business to the limited partnership since the GmbH & Co. KG itself (and not the partners) owns the business. The formation of the GmbH & Co. KG has to be applied for registration with the commercial register. The filing is to be made by all partners. As for any application to the commercial register the signatures of the applying individuals have to be authenticated by a notary. The filing must contain: family name, first name, date of birth and residence of every partner; firm name of the partnership and its place of domicile; date on which the partnership commenced and amount of the capital contribution of each limited partner.555 The partnership agreement itself does not have to be attached to the application. Upon registration the effectiveness of the commercial partnership begins with respect to third parties.556 The GmbH & Co. KG may commence its business even prior to registration; in this case, however, the limited partners are in principle also fully liable for those business debts incurred prior to registration.557 This applies correspondingly for limited partners joining an existing limited partnership and who are not yet registered with the commercial register when participating in the business.558 183 As indicated above, management and representation are exclusively dedicated to the GmbH as the general partner. Fundamental decisions, however, are reserved to the partnership meeting.559 In addition the partnership agreement can narrow/enlarge the competences of the partnership meeting and determine how rights, obligations, etc. are exercised. The management is bound by the decisions of the partnership meeting, but limiting the scope of the power of representation is ineffective as to third parties.560

550 551 552 553 554 555

556 557

558

559 560

292

§ 110 HGB. § 119 HGB. § 121 HGB. § 122 HGB. § 109 HGB. § 106, § 161 sec. 2 HGB. The publication (in the designated papers) of the registration of the limited partnership does not have to contain information regarding the limited partners, § 162 sec. 2 HGB. § 123 sec. 1, § 161 sec. 2 HGB. § 176 sec. 1 HGB; the unlimited liability of limited partners can only be avoided if their limited liability was known to the creditor. § 176 sec. 2 HGB. N.B: As a consequence, new limited partners should join the partnership only under the explicit condition of registration with the commercial register. § 116 sec. 2, § 161 sec. 2 HGB. § 126 sec. 2, § 161 sec. 2 HGB.

Frank Dornseifer

12. GmbH & Co. KG

Germany 184

Partner resolutions are generally adopted through the consent of all partners entitled to participate in the resolution.561 b)

Change and Withdrawal of Partners, Dissolution

The transfer of a partnership interest as well as the acceptance of new partners are a 184 simple change of the partnership agreement and therefore requires only a written or oral agreement. This makes the GmbH & Co. KG an attractive corporate form for publicly held business entities. The continued existence of the partners is in principle a precondition for the continued existence of the partnership. With respect to the economical relevance of commercial partnerships their continued existence irrespective of that of their partners is nevertheless of great importance. For a limited partnership/GmbH & Co. KG as a quasi legal entity the Commercial Code therefore provides that the death of a partner, termination of the partnership agreement by one partner, commencement of insolvency proceedings pertaining to the assets of a partner only leads to the withdrawal of the partner562 and not to the dissolution of the entity. With regard to the death of a partner there is a distinction between the general and the limited partner: upon the death of a limited partner the partnership shall be continued with the heirs whereas the death of the general partner leads to the liquidation of the partnership if no substitute general partners enter into the partnership; otherwise the limited partners may also agree to continue the business as a general partnership, i. e. with unlimited liability for the partners. Remaining reasons for dissolution are only e. g. a corresponding resolution of the partners, commencement of insolvency proceedings pertaining to the assets of the partnership – which is the most frequent reason –, and a judicial decision.563 The dissolution is followed by the liquidation which is similar to the liquidation procedure for a GmbH (winding up of the business, collecting of claims, converting of assets into cash, paying of creditors, distribution of remaining cash to partners, etc.). Regarding the commencement of insolvency proceedings pertaining to the assets of the partnership it should be noted that the special provisions of the Insolvency Code, which shall not be explained here, prevail for the liquidation procedure pursuant to the Commercial Code. c)

Taxation/Financial Reporting

A GmbH & Co. KG – as it is qualified as a partnership and therefore deemed to be 185 transparent for tax purposes – is not taxed as a separate entity.564 Thus profit or loss – as shown in the partnership’s balance sheet and regardless if retained or distributed– is not subject to corporate income tax, but attributed directly in proportion to their investment in the partnership to the partners. Individual partners are subject to income tax („Einkommensteuer“) and corporate partners are subject to corporate income tax („Kr561

562 563 564

§ 119, § 161 sec. 2 HGB. The partnership agreement can of course provide for a different majority. § 131 sec. 3, § 162 sec. 2 HGB. § 131 sec. 1, § 162 sec. 2 HGB. For trade tax purposes, however, it is a separate taxable entity and the taxable income is calculated and paid at the level of the partnership itself.

Frank Dornseifer

293

186

Germany

III. The Limited Liability Company – GmbH

perschaftssteuer“). For the computation of the tax relevant profits of a partner a remuneration received by a partner – e. g. for providing services or a loan to the partnership – is considered to be tax neutral, i. e. it has to be added to his portion of the partnership profits for income taxation purposes. 186 Concerning financial reporting a GmbH & Co. KG is basically subject to the same regulations as a GmbH is.565 565

§ 264 a HGB. Cf. sec. III.9. above.

Greece Vasiliki Vavitsa-Hohenau

Table of contents I.

Introduction

II. Company Limited by shares – Anonimi Etairia (AE) 1. Character of the AE 2. Formation of the AE a) Formation procedure aa) Pre-approval of the company’s trade name and distinctive title bb) Adoption of the articles of association cc) Subscription of the share capital dd) Authorization of the AE’s formation and approval of its statutes ee) Publication (1) Registration in the Register of Companies Limited by shares (2) Publication of the announcement in the Bulletin of Companies Limited by shares and Companies with Limited Liability of the Government Gazette ff) Simplified registration procedure gg) Additional formation steps b) Costs/Duration c) Requested information on the AE’s printed material 3. The shareholder a) Rights and duties of a shareholder b) The General Meeting of shareholders aa) Distinctions of the General Meeting of shareholders (1) Ordinary and extraordinary (2) Common and exceptional (statutory) (3) Initial (first) and repeated

Vasiliki Vavitsa-Hohenau

303

304 304 305 305 305 305 306

c) 4. a) b) c)

307 307 307

308 308 308 310 310 311 311 312

d) 5. a)

312 312 313 313

b)

bb) Convocation of the GM and preparation of its sessions cc) Resolutions of the GM (1) Quorum and majority requirements (2) Challenging of resolutions Termination of the shareholder’s identity The AE share capital Subscription and payment of the share capital Contributions in cash and in kind Capital increase aa) Capital increase by means of new contributions (1) Capital increase by resolution of the common GM of shareholders (2) Capital increase by resolution of the Board of Directors (3) Pre-emption right bb) Capital increase by means of capitalization of reserves and profits cc) Capital increase by means of conversion of bonds into shares and exchange of founders’ titles for shares dd) Stock option programme Capital reduction The AE share Classes of shares aa) Bearer and registered shares bb) Preferred shares cc) Redeemed shares Transfer of shares

313 314 315 316 318 318 318 320 320 321

321 321 323

324

325 326 326 327 328 328 329 330 330

295

Greece

c)

6. a) b) 7. a) b) c) d) e) 8. a) b) c) 9. a)

b)

c) 10. a)

296

aa) Bearer and registered shares not listed on the Athens Stock Exchange bb) Bearer and registered shares listed on the Athens Stock Exchange cc) Blocked shares Own shares aa) Prohibition of assumption of own shares bb) Prohibition of acquisition of own shares cc) Prohibition of receipt of own shares as a pledge and other restrictions The articles of association of the AE Mandatory content Amendment of the articles of association Board of Directors Appointment and termination of office of the members of the BoD Composition and function of the BoD Rights and duties of the members of the BoD Other administrative organs Liability of the BoD Auditors Appointment of the auditors Rights and duties of the auditors Liability of the auditors Accounting Annual financial statements (annual accounts) aa) Approval of the annual accounts and publication requirements Distribution of profits aa) Restrictions concerning the distribution of profits bb) Way of distribution of profits Setting up of reserves Termination of business Dissolution of the AE aa) Expiration of the AE’s duration bb) Resolution of the exceptional GM of shareholders cc) Declaration of the AE’s bankruptcy

Table of contents

331 331 332 332

dd) Revocation by the administrative authority of the authorization of the AE’s formation b) Liquidation of the AE aa) Appointment and removal of liquidators bb) Duties of the liquidators c) Revival of the AE

353 353 353 354 355

332 332 334 334 334 336 337 338 339 340 342 342 344 344 345 346 346 346 348 349 350 350 350 351 351 352 352 352

III. Company with Limited Liability – Etairia Periorismenis Euthinis (EPE) 1. Character of the EPE 2. Formation of the EPE a) Formation procedure aa) Pre-approval of the company’s trade name and distinctive title bb) Adoption of the articles of association cc) Payment of the capital, capital concentration tax and other fees dd) Publication (1) Registration in the Book of Companies (2) Publication of the announcement in the Bulletin of Companies Limited by shares and Companies with Limited Liability of the Government Gazette ee) Additional formation steps b) Costs/Duration c) Requested information on the EPE’s printed material 3. The company member a) Rights and duties of the company member b) The Meeting of company members aa) Distinctions of the members’ Meeting bb) Convocation of the members’ Meeting cc) Resolutions of the members’ Meeting (1) Majority requirements (2) Challenging of resolutions c) Exclusion and withdrawal of the company member

356 356 357 357 357 358 358 359 359

360 360 361 362 362 362 364 364 364 365 365 366 366

Vasiliki Vavitsa-Hohenau

Index 4. a) b) c) 5. a) b) c)

6. a) b) 7. a) b)

The EPE share Classes of shares Transfer of shares Own shares The articles of association of the EPE Mandatory content Amendment of the articles of association Capital increase/reduction aa) Capital increase bb) Capital reduction Managers of the EPE Appointment and removal of the managers Duties and liability of the managers Accounting Annual financial statements (annual accounts) Audit requirements

Greece 367 368 368 369 369 369 371 371 371 372 372

c) Distribution of profits and setting up of reserves 378 8. Termination of business 379 a) Dissolution of the EPE 379 b) Liquidation of the EPE 380 9. Partnership Limited by shares – Eterorrithmi Etairia kata metoches 382

IV. General aspects of taxation of

the Company Limited by shares (AE) and the Company with Limited 383 Liability (EPE) in Greece

373 374 376

V. Personal statute and branches of

376 378

2.

companies 1.

Branches or agencies of Companies Limited by shares Branches or agencies of Companies with Limited Liability

384 385 386

Index Company Limited by Shares administrative authorization 10, 12, 13 revocation 15, 138 et seq. agencies 225, 227 et seq. annual financial statements 118 et seq., 143 amendment 127 approval 127, 143 consolidated 123 content 120 international accounting standards 123a publication 125 et seq., 143 articles of association adoption 7 amendment 92 et seq. approval 10 draft 7, 18 mandatory content 89 et seq. notarization 7, 17, 18 optional content 90, 91 publication 13 registration 12, 14

Vasiliki Vavitsa-Hohenau

auditors 112 et seq. duties 116 liability 117 number of 113, 115, 116 qualifications 114 report 116 rights 116 balance sheet 120, 143 summarized 122, 126 bank account 15 bankruptcy 137 Board of Directors 95 et seq. acts outside the company’s object 96 authorities 96 composition as a body 15 convocation 100 Directors (See members) interim Directors 97 liability 109 et seq. majority 103 management report 124 members 95, 97 et seq. duties 105

297

Greece liability 109 et seq. proxy 103, 107 rights 104 transactions with the AE 106 minutes 102 other administrative organs 107 et seq. place of meeting 101 provisional BoD, 97 quorum 103 resolutions 103 bonds 62 et seq. Book of Shareholders 79 branches 89, 225, 226 et seq. business object (See object) business start 6, 15 capitalization of reserves and profits 59 et seq. Central Depository AE 72, 80 Chartered Accountants 115 contributions 49 et seq., 47 control of legality 10 conversion of bonds into shares 62 of preferred shares into common shares 75, 76 of registered shares into bearer shares 71 costs formation 17 transfer of shares 79 credits granted by the AE 106 debenture loan 44, 62 dissolution 134 et seq. distinctive title 6 distribution of liquidation proceeds 143 of profits 128 of shares to the personnel 84 dividend 128 et seq. domestic AE 224 dominating AE 87 duration 135 equity, loss of 136 foreign AE 224 formation contract (See articles of association) formation procedure 6 et seq. completion 15 costs 17 duration 18

298

Index founders agreements 91 liability for pre-incorporation acts 16 proxy 7, 16 founders’ titles 63 General Meeting of shareholders 24 et seq. Chairman 31 convocation 29 et seq. distinctions 25 et seq. majority 35 minutes 31 place of meeting 31 quorum 34, 85, 87 resolutions 31 et seq., challenging of 38 et seq. guarantees granted by the AE 106 inspection 21, 22, 112 inventory 118, 143 legal capacity 224 legal personality 3, 12, 140 liquidation 140 et seq. listed on the Athens Stock Exchange 10, 12, 14, 44, 84 loans granted by the AE 106 management 95 et seq., 21, 22, 112 merchant capacity 3, 118, 140 nationality 224 negotiable security (See share certificate) number of 4 object 89, 140 personal statute 224 power(s) of attorney 7, 16, 30, 227 pre-approval procedure 6, 7, 18 pre-emption right 58 pre-incorporation acts 16 printed material 19 profits capitalization 61 distribution 128 et seq. proxy (See power(s) of attorney) publication 11 et seq. publication in the Bulletin of AE and EPE of the Government Gazette 13, 15, 18 registration in the Register of Companies Limited by shares 12, 14, 18 Register of Companies Limited by shares 12 registered office (See seat)

Vasiliki Vavitsa-Hohenau

Index registration 12 simplified registration 14 report of auditors 116 of Board of Directors 124 of liquidators 143 representation 96 reserve(s) 132 et seq. capitalization 60 revival 135, 145 et seq. seat 89, 224 share capital 43 et seq. increase 47, 51 et seq. by capitaliz. of reserves and profits 59 et seq. by conversion of bonds into shares 62 by exchange of founders’ titles for shares 63 by new contributions 53 payment 57 pre-emption right 58 subscription 57 minimum amount 8, 44 payment 45 et seq. full 46 of amount of increase 57 partial 47 verification 15 redemption 77 reduction 48, 65 et seq. subscription 8 et seq., 45 by another company 87 direct 8 of amount of increase 57 public 8, 9 share certificate 47, 67 et seq. shareholder(s) 20 et seq. agreements 32, 91 Book of 79 duties 20 liability 3, 16, 20 minority 21 et seq. proxy 7, 16, 30 rights 20 et seq., 58 share(s) 67 et seq. acquisition 20, 84, 87 assumption 8 et seq., 83, 87 blocked 81 cancellation 48, 84

Vasiliki Vavitsa-Hohenau

Greece classes 70 bearer 71 preferred 73 et seq. redeemed 77 registered 47, 71 co-ownership 68 dematerialized 72, 80 deposit 23, 30 distribution to the personnel 84 inheritance 79, 84 listed on the Stock Exchange 3, 9, 72, 80 own shares 82 et seq. pledge 68 sale 48, 84 “to the order” 70 transfer 47, 78 et seq. usufruct 68 value nominal 8, 69, 89 stock exchange 84 source 3 special representatives 110 state supervision 4, 112 statutes (See articles of association) stock option programme 64 striking off the Register of Companies Limited by shares 15, 143 supervisory board 112 taxation 222 et seq. termination of business 134 et seq. trade name 89 right of use 6, 15, 18 underwriter 9, 58 valuation 50 voting procedure 32 right 20, 30, 32 Company with Limited Liability agencies 225, 230 et seq. annual financial statements 205 et seq. articles of association 189 et seq. adoption 153 amendment 181, 191 draft 153, 163 mandatory content 189 et seq.

299

Greece notarization 152, 153, 162 nullity 153 optional content 190 publication 158 registration 157 signature 153 summary 158 attorney presence 153, 185, 191 audit 209 et seq., 116 balance sheet 206, 219 summarized 210 bank account 159 bankruptcy 214 Book of Company Members 187 branches 225, 230 et seq. business object (See object) business start 159 capital 148, 154, 192 et seq. increase 192 minimum amount 148, 154, 189 payment 154 reduction 181, 193 company member(s) 165 et seq. agreements 190 Book of 187 competition (prohibition of) 169, 170 duties 169, 170 exclusion 170, 179 et seq. liability 149, 160, 161 rights 166 et seq. withdrawal 160, 181 company part(s) 182 et seq. (See also shares) contributions 154 ancillary 170 in kind 154, 182 supplementary 170 costs formation 162 transfer of company parts (shares) 185 dissolution 214 et seq. distinctive title 152 distribution of liquidation proceeds 219 of profits 211, 212, 222 dividend 211 domestic EPE 224 duration of the EPE 189, 214

300

Index equity, loss of 214 foreign EPE 224 formation 151 et seq. additional steps 159 costs 162 duration 163 other fees 155 requirements 151 formation contract/deed (See articles of association) founders liability 160, 161 proxy 160 withdrawal 160 inventory 118, 205, 219 large EPE 209 legal capacity 224 legal personality 148, 159, 217 liquidation 217 et seq. management 194, 196, 200 managers 194 et seq. acts outside the EPE’s object 200 appointment 196 authorities 194, 200 capacity to be 195 competition (prohibition of) 176, 201 duties 201 liability 202, 203, 210 merchant capacity 200 minutes 201 removal 177, 197, 198 remuneration 204 report 207 resignation 199 termination of office 199 Meeting of company members 171 et seq. authorities 171 convocation 173 et seq. distinctions 172 majority 176 minutes 176 resolutions 175 et seq. merchant capacity 148, 189, 217 nationality 224, 176 negotiable security 182 nullity 153, 154, 214 number of 150

Vasiliki Vavitsa-Hohenau

List of main reference books object 189, 176 participation portion 182 personal statute 224 power(s) of attorney 153, 160, 231 pre-approval procedure 152, 163 pre-emption right in the case of capital increase 192 in the case of transfer of shares 186 pre-incorporation acts 160 printed material 164 profits 211 et seq. proxy (See power(s) of attorney) publication 156 et seq. duration 163 publication of the announcement in the Government Gazette 158 registration in the Book of Companies 157 registered office (See seat) representation 194, 200 reserve 211, 213 seat 189, 224 share certificate 148, 182 shareholders (See company members)

Greece share(s) 148, 182 et seq. classes of 184 co-ownership 183 inheritance 186, 187 own 188 pledge 183 principles governing 183 transfer of 185 et seq. usufruct 183 value 182 special representatives 178 statutes (See articles of association) taxation 222 et seq. trade name 189, 217 right of use 152, 159 valuation (See contributions in kind) voting right 166, 177 Joint Ship-Ownership 1, 2 Partnership Limited by Shares 221 Private Limited Company (see Company with Limited Liability) Public Limited Company (see Company Limited by Shares)

List of main reference books Alexandridou E., Dikaio Emporikon Etairion, Volume II: Capital Companies, 2nd edition, 2000 Antonopoulos V., Dikaio Emporikon Etairion, Volume I: Personal Companies, 2nd edition, 1998 and Volume II: Capital Companies, 2nd edition, 1998 Athanasopoulos T., Symbolaiografiko Dikaio, Volume II, 2nd edition, 2004 Drillerakis I., Anonimes Etairies (Nomothesia-Nomologia-Ypodigmata), 2003 Georgakopoulos L., To dikaion ton Etairion, Volume II, 1972 and Volume III, 1974 Georgakopoulos L./Michalopoulos G., Dikaio Etairion (AE-EPE-Personal), 6th edition, 2003 Kotsiris L., Greek Company Law, 3rd edition, 2001 Michalopoulos G./Sotiropoulos G., Etairia Periorismenis Euthinis (Nomothesia-Nomologia-Ypodigmata), Volume II, 2001 Mouzoulas S., Dioikitiko Simboulio AE (Nomologia Eton 1920-1995), 2nd edition, 1996 Pampoukis K., Dikaion Emporikon Etairion, General Part, 1979 Pampoukis K., Eisigiseis Emporikou Dikaiou, 3rd edition, 1990 Pampoukis K., Dikaio Anonimis Etairias, Volume I, 3rd edition, 1991 and Volume II, 2nd edition, 1994 Papapolitis & Papapolitis Law Offices, Law 2190/1920 & 3190/1955, 2000 Vasiliki Vavitsa-Hohenau

301

Greece

List of abbreviations

Passias I., Dikaion anonimou etairias, Volume I, 1955 and Volume II, 1969 Perakis E., To Dikaio tis EPE (L. 3190/1955), 1994 Rocas N., Emporikes Etairies, 4th edition, 1996 Spyridonos A., Ta dikaiomata meiopsifias stin AE, 2001

List of abbreviations AE

a. o. Arm. art. arts. BoD C. C. C. L. C. P. C. DEE EC EEmpD

e. g. EPE

etc. et seq. ff. GM

Gov. Gaz. IAS

i. e. KEDE

L. L. D. MAE

M. D. NoB par. pars. P. D. sec. secs. S. M. F. I.C. sub. subs. TAE & EPE

302

(Anonimi Etairia) Company Limited by shares/Public Limited Company among others Armenopoulos, Journal article articles Board of Directors Greek Civil Code Compulsory Law Greek Civil Procedure Code Dikaio Epichiriseon kai Etairion, Journal European Community Epitheorisi Emporikou Dikaiou, Journal for example (Etairia Periorismenis Euthinis) Company with Limited Liability/ Private Limited Company et cetera, and so on et sequentia, and the following and the following articles General Meeting of shareholders Government Gazette International Accounting Standards id est, in other words (Kodikas Eispraxeos Dimosion Esodon) Codex on the Collection of Public Proceeds Law Legal Decree (Mitroo Anonimon Etairion) Register of Companies Limited by shares Ministerial Decision Nomiko Bima, Journal paragraph paragraphs Presidential Decree section sections Single Member First Instance Court subparagraph subparagraphs (Teuchos Anonimon Etairion kai Etairion Periorismenis Euthinis) Bulletin of Companies Limited by shares and Companies with Limited Liability

Vasiliki Vavitsa-Hohenau

I. Introduction

I.

Greece

1

Introduction

Greek commercial law recognizes the principle of the restricted number1 (numerus 1 clausus) of commercial companies (arts. 19 and 47 Greek Commercial Law2). However, only four of the altogether eight3 recognized commercial company forms in Greece are characterized as “capital” companies. These are: the Public Limited Company, also called Company Limited by shares (Anonimi Etairia, “AE”), the Private Limited Company or Company with Limited Liability (Etairia Periorismenis Euthinis, “EPE”), the Partnership Limited by shares (Eterorrithmi kata metoches Etairia) and the Joint Ship-ownership (simplioktisia). In contrast to the “personal” commercial companies, the object of the “capital” corporations is implemented through the property contribution of the company members (capital participation). The main characteristics of the capital corporations consist, therefore, in the existence of a share capital, paid up to the legal entity by its members by means of contributions and the absence of a personal liability on the part of the company members for the company’s obligations and debts.4 The Company Limited by shares (AE) represents the purest form of a capital company, 2 while the other three aforementioned company forms contain also features that express similarities to the personal companies. Since the Company Limited by shares (AE) and the Company with Limited Liability (EPE) are the most common capital company forms today in Greece for the exercise of small- and medium-sized business, only these two corporate forms will be described below in detail. A brief presentation of the main characteristics of the Partnership Limited by shares (Eterorrithmi kata metoches Etairia) is included in a small chapter, while the Joint Ship-Ownership5 is not dealt with in this book.

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This means that the adoption of another company form than one of those, specifically provided for by the law for the carrying out of a commercial undertaking, is prohibited. Royal Decree 19. 04./01. 05. 1835. The other four commercial company forms, provided for by the Greek law, are: the General Partnership (Omorrithmi Etairia, “OE”), the simple Limited Partnership (Apli Eterorrithmi Etairia, “EE”), the Silent Partnership (Aphanis Etairia) and the Cooperative (Sinetairismos). Other “capital” elements of these corporate business forms are: 1) changes related to the persons of the company members, like death or bankruptcy, have, in principle, no influence on the existence of the company, 2) the participation of a person in the company is, in principle, freely transferable, 3) the administration of the company is carried out by a special organ, elected by the company’s supreme organ, 4) the rights of each company member are proportionate to the amount of its property contribution to the company, 5) the resolutions of the company’s supreme organ are adopted mainly by a majority of capital etc. It must be pointed out that this sui generis corporate form has no legal personality and is governed by the arts. 10-36 of the Greek Code of Private Maritime Law (L. 3816/1958).

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II. Company Limited by shares – Anonimi Etairia (AE) 1.

Character of the AE

3 The Company Limited by shares (“Public Limited Company” or “stock corporation”) is called in the Greek terminology “Anonimi Etairia” (AE).6 The basic source, governing this corporate form, is the Codified Law 2190/1920,7 which has been amended several times especially in order to be adapted to the EC Directives on the harmonization of the national company laws. As mentioned above, it is the purest form of a capital company and has the following main characteristics: – The merchant capacity. An AE is a “commercial” company ex lege by reason of its form, i. e. even if its object is not the carrying out of a commercial undertaking (art. 1).8 – The legal personality (art. 7b par. 10). The legal entity of the AE commands its own property, out of which the claims of its creditors may be satisfied. The shareholders are, therefore, not liable for the AE’s obligations and debts. – A mandatory fixed capital, divided into equal parts, called “shares”, which are mostly incorporated into negotiable securities and are freely transferable. The shares of an AE may be admitted to official listing on the Athens Stock Exchange, if the requirements provided for by the law (P. D. 350/1985) are fulfilled. – A three-tier structure, consisting of the General Meeting of shareholders, the Board of Directors and the auditors. 4 The AE is modelled for the exercise of big enterprises. For this purpose, its relatively high share capital (at least EUR 60,000,–, art. 8 par. 2) is divided into shares of small value (EUR 0,30 – EUR 100,–, art. 14 par. 1), so that even the small investors may find interest in assuming such shares. The concentration of the capital is, therefore, possible through the entrance into the AE of a large number of investors. Due to the various interests, which are interwoven with the formation and operation of the AE (interests of shareholders, creditors, employees, customers, national economy in general), the AE is subjected to a strict state supervision (arts. 51-53, 39a-40e), exercised mostly by the locally competent Prefect as representative of the Minister of Development and connected with a specially developed publication system. The local competence of the respective authorities (Chamber, Court, Prefecture, Public Financial Authority, Bar Association etc.) is determined on the basis of the place of the AE’s registered office. Nowadays, there are approximately 50,000 AE in Greece, most of which are small- and medium-sized enterprises.

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For simplification reasons, the abbreviation “AE” will be used in any context, where the Greek Company Limited by shares is meant. Gov.Gaz. A’ 37/30. 03. 1963. If not indicated otherwise, the articles in this chapter (II.). refer to the L. 2190/1920.

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2.

Formation of the AE

a)

Formation procedure

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The law (L. 2190/1920) provides for a whole number of steps, which have to be completed, for the AE to acquire its legal personality. These are: aa)

Pre-approval of the company’s trade name and distinctive title

The right of the AE to use the specific trade name and distinctive title, chosen by its 6 founders, is subject to the pre-approval of the Chamber9 of the district, where the registered office of the AE is (going to be) located; such pre-approval10 is rendered on the basis of the company’s declared object and is valid for a period of two (2) months from the date of its issuance, during which the company in question must finalize its right by registering (“announcing its business start”) at the competent Chamber. For the purpose of certification of the exercised pre-control, the competent Chamber issues a pre-approval certificate, which must be subsequently and obligatorily submitted by the AE in formation to the notary public and to the administrative authority for the implementation of further formation requirements (art. 4, art. 5a par. 1 subs. b and c L. 1089/1980). bb) Adoption of the articles of association

An AE may be formed by at least two (2) founders (legal persons or individuals), who 7 have the legal capacity11 to contract and are all in agreement with each other not only on their intention to establish an AE, but also at least on the basic matters12 of the articles of association. The articles of association (statutes, “katastatiko”) are deemed to be the “constitution” of the company to be established, since they arrange the whole structure and operation of the AE according to the founders’ will, and must always embrace the form of a notarial deed (art. 4 par. 1 L. 2190/1920, art. 40 Commercial Law, arts. 61 and 63 Civil Code). In practice, the company’s founders address themselves to an attorney, who draws up and signs a draft of the articles of association on the basis of the agreements between the founders. This must be, subsequently, submitted together with the receipt for payment of the attorney fees,13 the full and accurate identity

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Which Chamber (of Commerce, Industry, Arts and Crafts etc.) is competent, is determined by the declared object (industrial etc.) of the AE in formation. In every Chamber is kept a Register of trade names and distinctive titles of the respective company types (art. 4 par. 5 and art. 5 L. 1089/1980). To this effect, the AE in formation submits an application to the competent Chamber, stating the chosen trade name, distinctive title and object and pays the respective fee. If the number of the founders is less than two (2) or none of them has the legal capacity to contract at the time of signature of the notarial deed of the company’s statutes, the AE may be declared null and void by a court decision (art. 4a par. 1 subs. c and d L. 2190/1920). Such as the company’s trade name and distinctive title, registered office, object, share capital, number and kind of shares to be issued and percentages of the founders’ participation in the share capital etc. The founders must pay the attorney fees in advance to the competent Bar Association.

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particulars of the founders and the pre-approval certificate14 to the notary public, who draws up the AE’s formation contract.15 The notary public is obliged not to proceed to the preparation of the notarial deed, but to request the repetition of the pre-approval procedure by the competent Chamber, when the AE’s object, as it appears in the draft of the statutes, differentiates vastly from the one, on the basis of which the pre-approval of the AE’s trade name has been rendered (art. 5a par. 1 sub. c L. 1089/1980). The AE’s formation contract (statutes) must be signed by all the founders or their proxies, in which case the notarized powers of attorney must be filed with the notary public. A certified copy of the notarial deed of the AE’s statutes must be, further, submitted by the AE in formation to the competent Chamber, which countersigns it (art. 7 L. 2081/ 1992). cc)

Subscription of the share capital

8 According to the dominant doctrine, the subscription of the AE’s share capital, i. e. the assumption of all its shares by the shareholders at a price at least equal to their nominal value, is a formation requirement of the AE. Subscription is the commitment of the shareholders to pay their contributions (in cash /in kind) to the company in return of the shares assumed. The minimum amount of share capital of an AE to be established is EUR 60,000,– (art. 8 par. 2 L. 2190/1920) and the AE may issue shares at a price equal to their nominal value (EUR 0,30 – EUR 100,–, art. 14 par. 1), specified by the statutes or higher than that. The share capital must be subscribed in whole either by at least two (2) of the AE’s founders by means of a subscription contract (also called “contract of assumption of the shares”), which is concluded between the subscribing founder and the other co-founder(s) and is mostly included in the articles of association16 (direct subscription) or by the public through public offering (public subscription) (art. 8 par. 1 sec. 1 L. 2190/1920). In the last case, the subscription contract is concluded between the subscribing third person and the group of founders mostly by means of a private document and with the intervention of a bank at a time after the signature of the statutes. 9 The requirements for the subscription of the AE’s share capital by the public (public subscription) are (art. 8a L. 2190/1920): – a minimum share capital of EUR 1,500,000,–, – permission granted by the Capital Market Commission to this effect, which must also approve the company’s information bulletin (prospectus), – disposal of the company’s shares to the public through an underwriter (intermediary bank or other stock exchange AE, art. 26 L. 1806/1988), which co-signs the AE’s information bulletin and – obligation of the AE, obtaining capital through public offering, to apply within one (1) year from the completion of the public subscription for the official listing of its shares on the Stock Exchange. 14 15

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See above II.2. a) aa). The notarial deed may bear the title “Formation of the AE” or “Articles of Association of the AE” or “Company Agreement” and is a registered public document. Greek law makes no distinction between the formation deed and the articles of association of an AE, but they are one and the same document. And it therefore embraces the form of a notarial deed.

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dd) Authorization of the AE’s formation and approval of its statutes

After the signature of the notarial deed of the AE’s statutes, a certified copy of it, which 10 has been additionally countersigned by the competent Chamber (art. 7 L. 2081/1992), accompanied by the pre-approval certificate17 of the AE’s right to use its specific trade name and distinctive title must be submitted by the AE to the administrative authority, which exercises a control of legality, i. e. examines whether the company’s statutes have been drawn up by means of a public deed in compliance with the law provisions governing the AE. In case of such compliance, the authority issues a decision, rendering to the AE the permit of its formation and approving its statutes (art. 4 par. 1 L. 2190/ 1920, art. 37 Commercial Law).18 The competent administrative authority for the exercise of such control is the Prefect of the district, where the registered office of the AE is located, representing the Minister of Development. By way of exception, banks, insurance, investment and mutual funds AE as well as AE, which have their shares listed on the Athens Stock Exchange (art. 7b par. 8 L. 2190/1920), are subject to a stricter control, exercised directly by the competent Central Department of the Ministry of Development. The administrative authorization is required not only for the initial articles of association, but also for every subsequent amendment of them. ee)

Publication

The law19 recognizes a double publication system concerning the AE’s formation, which 11 also applies in respect of other deeds and particulars of the company: (1)

Registration in the Register of Companies Limited by shares

Once issued, the administrative decision20 together with the approved articles of asso- 12 ciation are entered into the Register of Companies Limited by shares (“Mitroo Anonimon Etairion”, “MAE21”), kept in the Department of Commerce22 of the Prefecture, in the district of which the AE in question has its registered office (art. 7a par. 1 sub. a and art. 7b par. 1 sub. a sec. 1 L. 2190/1920). In the case of banks, insurance, investment AE as well as AE, which have their shares listed on the Athens Stock Exchange, such Register is kept in the competent Central Department of the Ministry of Development (art. 7b par. 8 L. 2190/1920, art. 1 M. D. K3-4114/1986). The registration in the MAE has a “constitutive” character: the AE begins to exist and acquires its legal personality, as soon as the administrative decision on its establishment and on the approval of its 17

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The Prefect is obliged to deny the approval of the AE’s statutes, if they are not accompanied by the pre-approval certificate (art. 5a par. 1 sub. b sec. 2 L. 1089/1980). The authorization of the AE’s establishment and the approval of its statutes are two separate administrative acts, included, however, in one and the same document (administrative decision). Arts. 7a and 7b L. 2190/1920, P. D. 16/22. 01. 1930, Ministerial Decisions K3-4114/1986 and K2-10200/2002, Directive 2003/58 / EC of 15. 07. 2003 (L. 221/04. 09. 2003). The decision of the Prefect, authorizing the AE’s establishment and approving its statutes, orders at the same time the registration of the respective documents in the Register of Companies Limited by shares. For simplification reasons, the abbreviation “MAE” will be used in any context, where the Register of Companies Limited by shares is referred to. The Department of Commerce of each Prefecture is part of the Ministry of Development.

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statutes has been registered in the MAE (art. 7b par. 10 L. 2190/1920). Once registered, the AE obtains its own registration number. (2)

Publication of the announcement in the Bulletin of Companies Limited by shares and Companies with Limited Liability of the Government Gazette

13 The competent Department (of the Prefecture or of the Ministry of Development) notifies the administrative decision on the company’s establishment together with the AE’s registration number to the founders of the AE. Subsequently, an announcement23 about the registration of the administrative decision and the company’s statutes in the MAE is dispatched on the initiative and at the expenses of the interested AE to the National Printing Office, in order to be published in the Bulletin of Companies Limited by shares and Companies with Limited Liability (“Teuchos Anonimon Etairion kai Etairion Periorismenis Euthinis”,“TAE & EPE”) of the Government Gazette. Such announcement must be previously countersigned by the administrative authority and the competent Public Financial Authority (art. 7b par. 1 subs. b and c L. 2190/1920, M. D. K2-10200/2002).24 The publication in the Government Gazette has merely a declaratory character (art. 7b pars. 13-15 L. 2190/1920). ff)

Simplified registration procedure

14 If the share capital of the new AE does not exceed the amount of EUR 300,000,–, the administrative authority (Department of Commerce of the Prefecture) proceeds to the registration of the company’s formation deed (statutes) in the Register of AE (MAE) at the same day, without exercising any control of legality. From this simple, one-day registration procedure are excluded: the Companies Limited by shares, provided for in art. 7b par. 8 (banks, insurance, investment AE and AE, which have their shares listed on the Athens Stock Exchange), the athletic AE as well as AE, deriving from the conversion of other type of enterprises (art. 7b par. 1 sub. a secs. 2 and 3 L. 2190/1920). gg) Additional formation steps

15 The AE’s formation procedure is considered to be completed through the publication in the Government Gazette of the announcement concerning the AE’s registration in the Register of AE (MAE). Nevertheless, the following actions must, additionally, occur: – Submission by the AE to the administrative authority (competent Department of the Prefecture or of the Ministry of Development) within one (1) month from its registration in the MAE of a certificate concerning the publication of the respective announcement in the Government Gazette; otherwise striking of the AE off the Register of AE (art. 7b par. 1 sub. c sec. 3 L. 2190/1920, M. D. K2-10200/2002). – Announcement of the AE’s business start to the competent Chamber, effected by the administrative authority (Prefecture) after the registration of the company’s 23

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The mandatory content of such announcement, which has the form of a summary of the AE’s statutes, is specified in art. 21 par. 3 L. 1599/1986. See below under III.2. a) dd) (2). By countersigning the respective announcement, submitted to them by the AE, the administrative authority (Department of Commerce) certifies, after control, the accuracy of the information, included in the announcement and the Public Financial Authority the payment of the capital concentration tax and other fees.

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– – –

– –

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formation deed (statutes) in the MAE. The new AE is, therefore, registered at the competent Chamber and finalizes so its right to use its trade name and distinctive title (art. 4 par. 1 and art. 5a par. 1 sub. c L. 1089/1980). Submission by the AE of (copies) of its formation deed to the competent Public Financial Authority, which certifies the payment of the capital concentration tax (equal to 1% of the company’s share capital). Such payment must be effected by the AE within fifteen (15) days after its registration in the MAE (art. 23 par. 2 sub. a L. 1676/1986). Declaration of the AE’s business start to the competent Public Financial Authority and endorsement of the company’s Books and particulars. Choice by the founders of the building(s), in which the premises of the AE are going to be lodged. Resolution of the company’s BoD upon its composition as a body and assignment of its representative authority to one or more of its members or third persons (art. 18 par. 2 L. 2190/1920); submission of a copy of such resolution to the administrative authority, in order to be subjected, after control, to publication (in the Register of AE and in the Government Gazette under the care of the competent Prefecture and at the expenses of the interested AE) (arts. 7a and 7b L. 2190/1920). Opening of a bank account in the name of the AE at any bank legally operating in Greece (art. 11 par. 6 L. 2190/1920). Payment of the initial share capital (contributions) by the shareholders and verification of such payment by a resolution of the BoD to be adopted within the first two (2) months after the company’s formation (registration in the MAE) (art. 11 par. 1). Under the penalty of revocation of the administrative decision establishing the AE, a copy of the minutes of the respective meeting of the BoD must be submitted by it to the Prefecture within twenty (20) days after the lapse of the aforementioned two-month period, in order to be subjected to publication (art. 7a par. 1 sub. f, art. 7b and art. 11 par. 5, referring to art. 48 par. 1 sub. a L. 2190/1920).

Actions, aiming at the company’s formation, are effected by the proxy of the founders of 16 the AE,25 who is so authorized by them by means of a written power of attorney, usually included in the company’s formation deed. Such person or the founders, who have carried out acts on behalf of the AE in formation (incorporation acts26) are liable for them fully and without limit, unless the AE assumes the obligations deriving therefrom

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The company during its formation stage is considered to be an entity of its own, called “founding” company (“idritiki etairia”), which has the elements of a company of civil law (arts. 741 ff. Greek Civil Code). Its object is the performance of the steps, required for the formation of the AE and it ceases to exist, as soon as the formation requirements have been fulfilled (art. 772 C. C.). Incorporation acts are considered to be those carried out by the founders or their proxy in the name of the AE in formation at a time after the signature of the statutes and until the company obtains its legal personality. For agreements, entered into before the signature of the statutes, the founders of the AE are personally, jointly and severally liable and the AE may take over the obligations, deriving therefrom, after the acquisition of its legal personality and according to the law provisions on the assumption of a debt (arts. 471 ff. C. C.).

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within three (3) months after the acquisition of its legal personality through its registration in the MAE (art. 7d L. 2190/1920). Once established, the AE is represented by its legal representative (BoD or third person) according to the provisions of the statutes (art. 18 par. 2 L. 2190/1920). b)

Costs/Duration

17 The costs for the formation of a Company Limited by shares with a share capital of EUR 60,000,– amount to approximately EUR 2,800,–, whereas in such calculation are included: the attorney and notary fees,27 other fees (Chamber etc.), costs of publication in the Government Gazette (of the announcement concerning the AE’s registration and of the BoD’s resolutions28) and the capital concentration tax. 18 In respect of the duration of the AE’s formation procedure, following considerations must be taken into account: the pre-approval of the company’s trade name and distinctive title is usually rendered by the competent Chamber within a couple of days after the filing of the relevant application by the founders; the preparation of the draft of the statutes by the attorney and of the final formation deed (statutes) by the notary public may be completed within a couple of days or a couple of weeks depending on whether the founders agree about all the matters of the statutes and provide both their attorney and the notary with the necessary information and documents. As already mentioned,29 the duration of the AE’s registration in the Register of AE (MAE) varies between one day and more, according to whether a control of the statutes’ legality must be exercised by the Prefect or not. Finally, the publication in the Government Gazette of the announcement concerning the AE’s registration in the MAE lasts a couple of days, but the founders or their proxies must always apply to the National Printing Office for such publication on time, so that they can submit the publication certificate to the administrative authority the latest one (1) month after the AE’s registration. If they fail to do so, the AE will be struck off the Register (art. 7b par. 1 sub. c L. 2190/1920). c)

Requested information on the AE’s printed material

19 Every document of the AE in printed form must state at least the following particulars (art. 7c L. 2190/1920):30 – the Register of Companies Limited by shares (MAE), in which the concrete AE has been registered, – the company’s registration number and

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The amount of the notary fees depends a. o. on the number of pages, the respective notarial deed of the AE’s statutes has. As basis for the above-mentioned calculation of the notary fees is taken a notarial deed of 18 pages and 2 copies. See above under II.2. a) gg). See under II.2. a) ff) about the simplified one-day registration procedure. See also art. 4 of the Directive 68/151 / EC, as replaced by art. 1 par. 5 of the Directive 2003/58 / EC (L. 221/04. 09. 2003).

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– the company’s trade name, registered office and if so, the fact that the AE is in liquidation.

3.

The shareholder

a)

Rights and duties of a shareholder

A person may become shareholder of a Company Limited by shares either by assuming 20 the shares of the concrete AE during its formation or capital increase or by acquiring shares by means of a contract of sale etc. or due to inheritance. 31 Not only individuals but also other companies may be shareholders of an AE, provided that they have legal personality, and there are no restrictions concerning their nationality. The shareholders have neither personal liability towards the AE’s creditors nor acquire they the merchant capacity merely through their identity as shareholders of the AE. Nevertheless, from the “partner – relationship”,32 which every share embodies, arises a number of rights and duties for the shareholder, while all rights,33 to which a share entitles its owner, are proportionate to the percentage of capital represented by the share (art. 30 L. 2190/ 1920). In particular, each shareholder enjoys the following rights and has the following duties: – Administrative rights: right to participate in the company’s organs (GM and eventually BoD), voting right (each share confers the right to one vote, art. 30 L. 2190/1920), right to inspect and right to require information of the AE. – Property rights: right to participate in the AE’s profits (first dividend) and in the proceeds of liquidation, always in proportion to the amount of the nominal value of the shares held, as well as right of pre-emption in the case of capital increase. – Duty to pay up the value of the share(s), assumed by him, by delivering to the AE his original contribution (in cash or in kind). – Duty of loyalty of the shareholder(s), who represent(s) the majority of the share capital, not to influence the AE’s organs to the direction of carrying out acts to the detriment of the interests of the legal entity and of the minority shareholders. The law34 accords, further, a number of rights to the minority of one or more share- 21 holders acting as a group, which represents a certain percentage35 of the share capital, in order to “strengthen” their chances to protect their interests against the will of the majority shareholders. In particular, shareholders, representing one twentieth (1/20) of the paid up share capital have the right mostly upon request, addressed to the BoD: – to convene an extraordinary GM of shareholders (art. 39 pars. 1 and 2), – to adjourn a GM (art. 39 par. 3), 31 32 33 34 35

About the transfer of shares inter vivos or mortis causa, see below under II.5. b). See below II.5. With the exception of preferred shares (art. 3 L. 2190/1920). L. 2190/1920. A percentage of 1/20 or 1/3 of the paid up share capital, unless the statutes provide for lower percentages, but in no case for lower than one half of the percentages set forth by the law (art. 39 par. 9).

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– to obtain information, disclosed by the BoD during the session of the ordinary GM, about the amounts paid or consideration given or contract concluded between the AE and members of the BoD, managers or other employees, and any useful information for an actual evaluation and understanding of the agenda issues (art. 39 par. 4), – to cause the adoption of a GM’s resolution by roll-call voting (art. 39 par. 7), – to request the inspection of the company by the Court36 (art. 40 par. 1 sub. a). 22 A minority of shareholders, representing one third (1/3) of the paid up share capital and not represented in the company’s BoD, has the right: – to acquire information by the BoD about the company’s affairs and the situation of its property, during or prior to the session of the GM (art. 39 par. 5) and – to request from the Court the inspection of the AE (art. 40 pars. 1 and 3), if it is assumed from the whole course of the company’s affairs that the management of the AE is not exercised according to the principles of wise and honest management. 23 In order to be entitled to exercise their rights, minority shareholders must keep their shares deposited with the AE’s Treasurer, the Consignment and Loans Fund, Bank of Greece or any other recognized Greek bank from the day of submission of the relevant request until the session of the GM or the issuance of the respective court decision (art. 39 pars. 6 and 8, art. 40 par. 4 L. 2190/1920). b)

The General Meeting of shareholders

24 The General Meeting (GM) of shareholders is the supreme organ of the Company Limited by shares and expresses the legal entity’s will by having the right to decide on all matters concerning the company, such decisions being binding also on absent or dissenting shareholders (art. 33 L. 2190/1920). aa)

Distinctions of the General Meeting of shareholders

25 The General Meeting of shareholders may be distinguished into: (1)

Ordinary and extraordinary

26 The ordinary GM is convened obligatorily at least once a year and in particular within six (6) months from the end of each financial year (art. 25 sec. 1 L. 2190/1920), in order to decide on the approval of the annual accounts, the distribution of profits (art. 34 par. 1 subs. c and d), election of auditors (art. 36 par. 2), discharge of the members of the BoD and the auditors from their liability (art. 35) and on the granting of a remuneration to the members of the BoD (art. 24). The first ordinary GM after the AE’s establishment elects the first BoD (art. 34 par. 1 sub. b), unless the company’s statutes have already appointed it. The ordinary GM may, further, deal with any other matter. The extraordinary GM is convened by the BoD at any time either optionally, when according to its opinion there are matters demanding the adoption of a resolution by the GM (e. g. amendment of the 36

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See below under II.8.

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statutes) or obligatorily, in the cases provided for by the law, e. g. convocation of the GM upon request of the auditors (art. 38) or of the minority of shareholders (art. 39 par. 1) or in order to appoint liquidators in case of the revocation of the administrative decision establishing the AE (art. 48 par. 2) or to decide the AE’s dissolution in case that the total of the company’s equity becomes less than half ( ) of the share capital (art. 47) etc. (2)

Common and exceptional (statutory)

The common GM of shareholders deals with matters of common importance and it 27 convenes and decides with a small quorum and majority (arts. 29 par. 1 and 31 par. 1), whereas the exceptional or “statutory” GM of shareholders resolves with a qualified quorum and majority (arts. 29 par. 3 and 31 par. 2) upon matters of enormous importance for the company, such as change of its nationality etc., which are specified by the law37 or entrusted to it by the articles of association. 38 (3)

Initial (first) and repeated

If the “first” GM of shareholders, which has been lawfully convened by the BoD, fails to 28 form the quorum required by the law, in order to deliberate validly on the agenda issues, the law gives to it the possibility to convene anew (“repeated” GM), requiring lower quorum percentages39 (art. 29 pars. 2 and 4 L. 2190/1920). bb) Convocation of the GM and preparation of its sessions

The GM of shareholders is convened by the lawfully elected BoD, which may even 29 charge a member of it, such as its President, with this task. The convocation of the GM is effected by means of a written invitation, which must (art. 26 par. 2 L. 2190/1920): – specify the building, the date and hour of the meeting as well as the issues on the agenda with clarity, – be posted up at a prominent place of the company’s premises and – be published a) in the Bulletin of AE and EPE of the Government Gazette, b) in one daily political newspaper of those issued in Athens, which in the opinion of the BoD has widest circulation throughout the country, c) in one daily financial newspaper, which fulfills the requirements of art. 26 par. 2 sub. c and d) in one daily or at least weekly newspaper of those issued in the place of the AE’s registered office.40 37

38

39 40

Matters, which belong to the decision-taking authority of the exceptional GM of shareholders, are those, provided for by arts. 29 par. 3, 3a, 3b, 13 par. 9, 15a par. 1 sec. 3, 45 par. 3, 47a par. 4 and 66 L. 2190/1920. See also II.3 b) cc) (1). About the common and qualified quorum and majority requirements, see below under II.3. b) cc) (1). See below under II.3. b) cc) (1). Should no newspaper be issued in this area, the invitation must be published in one daily or at least weekly newspaper of those issued in the capital city of the Prefecture, in the district of which the AE has its registered office. Additional provisions or exceptions apply concerning the publication of the invitation in respect of special AE e. g. Football AE etc. (art. 26 par. 2 L. 2190/1920, art. 23 L. 2469/1997, art. 10 par. 2 L. 3021/2002).

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II. Company Limited by shares – Anonimi Etairia (AE)

30 An invitation is not required, when shareholders representing the total share capital are present or represented at the meeting and none of them objects to it (art. 26 par. 3). Further, the convocation requirements have to be completed at least twenty (20) full days prior to the date of the GM’s session (art. 26 par. 1). At the same period of time the AE is obliged to submit to the administrative authority (Prefect) a certified copy of the GM’s agenda together with an explanatory report of the agenda issues and a copy of the pages of each newspaper, in which the invitation of the GM has been published (art. 26a par. 1). Ten (10) days prior to any ordinary GM every shareholder may take from the company a copy of the annual accounts as well as of the relevant reports of the BoD and the auditors (art. 27 par. 1). In order to be entitled to participate and vote at the GM, each shareholder must deposit his shares with the Treasurer of the AE or with the Consignment and Loan Fund or with any banking AE duly operating in Greece41 and submit to the company the relevant deposit receipt(s) at least five (5) days prior to the meeting; otherwise his participation requires the permission of the GM of shareholders (art. 28 pars. 1 and 4). Moreover, if a shareholder intends to participate in the GM by proxy,42 he must, additionally, submit to the AE the respective power of attorney43 also five (5) days prior to the meeting (art. 28 par. 3). If a shareholder is a legal entity, it may participate in the GM by appointing up to three (3) individuals as its representatives (art. 28 par. 1 sec. 2). On the basis of the respective deposit receipts the BoD prepares a list with the names of the shareholders, entitled to vote at the meeting and posts it up at a prominent place of the company’s premises forty eight (48) hours prior to any meeting. Such list must also indicate the names of the shareholders’ proxies, if any, the number of shares and votes held by each shareholder and the addresses of shareholders and proxies (art. 27 par. 2, art. 28 par. 5 L. 2190/1920). cc)

Resolutions of the GM

31 The General Meeting of shareholders is held obligatorily at the place, where the registered office of the AE is located or by way of exception, in another place in Greece pursuant to a special approval, granted to the AE by the administrative authority.44 An approval is not required, when all shareholders are present or represented at the meeting and all agree that the meeting should be held at such place (art. 25 L. 2190/1920). The GM is directed by its Chairman, who is either appointed by the articles of association45 or elected by the GM itself and he is assisted by a secretary and eventually by a vote counter. The duties of the Chairman consist a. o. in the verification of the existence of the required quorum and majority, direction of the discussions between the participating 41

42

43

44 45

314

The articles of association may designate other persons and the invitation of the GM may even name bankers established abroad, with whom the shareholders may deposit their shares (art. 28 par. 2). The proxy of a shareholder may also be a bank, if it is so authorized in writing (power of attorney), while such authorization is freely revocable and may not last for a period longer than fifteen (15) months (art. 30b). The AE’s statutes may require a certain form of such power of attorney: notarial deed, private document with authenticated signatures, simple letter or fax etc. Locally competent Prefect, representing the Minister of Development. The articles of association may provide that the President of the BoD shall enact the duties of a temporary Chairman of the GM, until the GM elects a permanent Chairman.

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shareholders and of the voting procedure, initiation of the registration in the Book of minutes of an exact summary of the GM’s debates and resolutions and upon request of a shareholder’s opinion. If only one (1) shareholder is present at the meeting, such meeting must be attended by a representative of the Minister of Development or a notary public of the area of the AE’s registered office, who must, in addition, countersign the minutes of the meeting (art. 32 L. 2190/1920). As already mentioned,46 each share47 gives its holder the right to vote, which may be 32 exercised by the shareholder or his proxy (art. 30). Agreements between shareholders about the way of exercise of the voting right are, under certain restrictions (art. 59 L. 2190/1920, arts. 178, 179, 281 C. C.), valid and binding only between the contracting shareholders. The voting procedure may take place in any suitable way: it may, therefore, be a special, general, secret or roll-call one. For special issues, such as the granting of remuneration to the members of the BoD, release of the BoD and the auditors from their liability etc., the law provides for a special voting procedure (art. 24 par. 2, art. 35 par. 1, art. 39 par. 7 L. 2190/1920). Within twenty (20) days after each session of the GM, the company must submit to the 33 administrative authority (Prefect) a certified copy of the minutes of such meeting (art. 26a par. 2 L. 2190/1920). (1)

Quorum and majority requirements

The quorum of the GM of shareholders, required by the law (art. 29 L. 2190/1920), 34 varies depending on whether the GM is a common or exceptional, an initial (first) or repeated one. 48 In particular, the common GM is in quorum and convenes validly on the items of the agenda, when shareholders or their proxies, representing at least one fifth (1/5) of the paid up share capital, are present (art. 29 par. 1). Should no such quorum be present at the first meeting, the GM must be held again (repeated GM) within twenty (20) days from the day of the cancelled one, after having been summoned at least ten (10) days before and it forms a quorum and deliberates validly on the agenda issues of the first meeting, irrespective of the amount of the paid up share capital, represented at it (art. 29 par. 2). On the other side, for the exceptional GM, deciding upon matters of extreme importance for the AE, the quorum is formed, when shareholders representing two third (2/3) of the paid up share capital are present or lawfully represented at the meeting (art. 29 par. 3). If no such quorum is present at the first meeting, the exceptional GM may be repeated twice (art. 29 par. 4). During its first repeated session a quorum of at least one half (1/2) of the paid up share capital must be represented at it and if not, the GM may be convened once more with a quorum of shareholders, representing at least one third (1/3) of the paid up share capital (art. 29 par. 4). The majority requirements vary according to whether the GM is a common or an 35 exceptional (statutory) one. In respect of the common GM, its resolutions are adopted 46 47 48

See above under II.3. a). With the exception of preferred shares without voting right, see below II.5. a) bb). About the distinctions of the GM of shareholders, see above under II.3. b) aa).

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by an absolute majority of the votes, represented at the meeting (art. 31 par. 1), while, as far as the exceptional GM is concerned, the resolutions are passed by the qualified majority of two third (2/3) of the votes, represented at it (art. 31 par. 2 L. 2190/1920). 36 Matters of extreme importance for the AE, a valid resolution upon which may be adopted only, when the qualified quorum and majority percentages are represented at the GM, are according to the law (art. 29 par. 3 L. 2190/1920): change in the AE’s nationality or business object, increase of the shareholders’ obligations, increase of the share capital, not provided for by the statutes (art. 13 pars. 1 and 2) or imposed by law provisions or effected by capitalization of reserves, reduction of the share capital, change in the way of the distribution of profits, merger, division, transformation, revival of the AE, extension of its duration or dissolution, authorization of the BoD or renewal of its authority to increase the share capital (art. 13 par. 1). The statutes may also specify other issues, for the deliberation of which an exceptional GM (with the qualified quorum and majority) must be held (art. 29 par. 5). 37 In particular, the company’s statutes may stipulate for the adoption of a resolution by the GM upon all or some specific matters higher percentages of quorum and majority than those provided for by the law, but in no case lower (arts. 29 par. 6, 31 par. 3). However, – concerning matters, for which the law requires the common quorum and majority (arts. 29 par. 1, 31 par. 1), the statutes may not provide for quorum and majority percentages equal to or higher than those, required by the law for matters, upon which the exceptional GM decides, i. e. the statutes may provide for a quorum and majority of maximum 2/3 minus one share (art. 29 par. 6, art. 31 par. 4 L. 2190/ 1920); – concerning matters, for which the qualified quorum and majority percentages are provided for by the law (arts. 29 par. 3, 31 par. 2), the statutes may not require the representation at the GM of the total amount of the share capital (art. 29 par. 6) nor a majority equal to the total of the shares, represented at the meeting, i. e. unanimity (art. 31 par. 4 sec. 2 L. 2190/1920). (2)

Challenging of resolutions

38 The resolutions of the General Meeting of shareholders may be either void or voidable. Ipso jure void are the resolutions of the GM (art. 35a par. 1 L. 2190/1920): – when they are adopted in violation of the law provisions, concerning the composition49 (and convocation50) of the GM or the quorum and majority requirements and – when they infringe by their content provisions of the AE’s articles of association, aiming exclusively or mainly at the protection of the company’s creditors.

49

50

316

Such is the case e. g. when the AE prohibits arbitrarily its shareholders from participating in or voting at the GM or when it permits non-entitled persons to participate and vote at the meeting. For example, when the GM was convened by an incompetent person or on the basis of a void resolution of the BoD or the invitation of the GM did not fulfill the law requirements.

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Apart from the aforementioned cases, void are resolutions of the GM, which violate any 39 other provision of the law, governing the Companies Limited by shares (L. 2190/1920), or the articles of association or obviously exceed the limits, imposed by the principles of good faith and public morals (arts. 174, 180, 281 C. C.). The nullity of a resolution of the GM for any reason whatsoever may be invoked by any interested person, such as shareholder, member of the BoD or third party within a two-year period of time, beginning from the time of submission to the administrative authority (Prefecture) of a copy of the minutes of the GM, during which the void resolution was passed (art. 35a par. 2, referring to art. 26a par. 2); the lapse of the two-year period remedies the resolution’s defectiveness. Besides that, the nullity of the GM’s resolution, despite its ipso jure effectiveness, may be verified by a decision51 of the Multi Member First Instance Court, which is effective erga omnes, pursuant to a declaratory action of any person having a lawful interest. Voidable resolutions of the GM are those producing their legal effects, until they are 40 nullified by a court decision. A resolution of the GM is voidable, when: – it rejects a request for granting information due to be given according to the provisions of the law or of the statutes (art. 35b par. 1) and – it approves a balance sheet, which consists of irregularities52 (art. 35b pars. 2 and 3). An action of nullification of the GM’s resolution may be brought against the legal entity 41 of the AE within six (6) months from the date of submission to the Prefecture of a copy of the GM’s minutes by: a) shareholders, representing one twentieth (1/20) of the share capital, who were present at the respective meeting and objected to the resolution or who, in violation of the law, were excluded from attending such meeting or if the GM was not properly convened, b) the BoD or c) any member of the BoD, if the implementation of the GM’s voidable resolution would entail his penal prosecution or his liability for damages. In the two last cases, the Court53 may appoint a special representative of the AE to conduct the legal proceedings, on the petition of any person having a lawful interest (art. 35c L. 2190/1920).

51

52

53

The verification of the resolution’s nullity by the Court has merely a declaratory character. The nullity is retroactive to the date, the respective resolution was passed. Even the implementation of the void resolution may be suspended by a court decision, according to the procedure of interim measures (arts. 682 ff. C. P. C.). Such is the case, when the balance sheet presents, in contravention to the provisions of the law or the statutes or to an extent not justified by the accepted commercial practice, the existence of reserves, depreciations or property items assessed at a value different from the one allowed by the law or generally it conceals profits, resulting in the non-distribution to the shareholders of the first dividend, specified by the statutes. This is a decision of the Single Member First Instance Court of the district, where the registered office of the AE is located, adjudicating according to the procedure of voluntary jurisdiction (arts. 739 ff. Civil Procedure Code).

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c)

Termination of the shareholder’s identity

II. Company Limited by shares – Anonimi Etairia (AE)

42 A person (individual or legal entity) ceases to be shareholder of an AE, as soon as he has transferred his shares or the company has annulled his “shareholder” identity. Such is the case, when the shares are cancelled54 by the AE, because the shareholder did not pay his contribution (art. 12 par. 2 sub. e L. 2190/1920) or in the case of capital reduction as well as in the case of termination, merger or transformation of the company. Due to the capital character of the AE, the law provides neither for a right of withdrawal nor for the possibility of exclusion of the shareholder from the AE.

4.

The AE share capital

43 The share capital of an AE is a fixed, abstract, mathematical quantity, specified in the statutes with a cardinal number and defined in money. It represents the AE’s pure property, which has to be formed and remain at the company’s disposal during the whole existence of the AE. The company’s share capital is divided into equal parts, called “shares” (art. 11a par. 1 L. 2190/1920). The sum of the nominal value of all shares is, therefore, equal to the total amount of share capital. 44 The amount and way of payment of the share capital belong to the mandatory content of the AE’s statutes and must be therefore specified by them, under the penalty of the company’s nullity (arts. 2 par. 1 sub. d and 4a par. 1 sub. a). The minimum amount of the share capital of an AE is EUR 60,000,– (art. 8 par. 2 L. 2190/1920), while AE, the share capital of which is subscribed in whole or in part by the public through public offering (public subscription) must have a share capital of at least EUR 1,500,000,– (art. 8a par. 1). The same minimum of capital is required for AE issuing a debenture loan by public offering (art. 8a par. 2 L. 2190/1920). For certain types of AE, such as banks, insurance AE and AE, which have their shares listed on the Athens Stock Exchange, special laws55 provide for increased amounts of minimum share capital or equity. a)

Subscription and payment of the share capital

45 Subscription and payment of the share capital lead together to its concentration, i. e. influx of property into the company in the form of in cash or in kind contributions. As mentioned above,56 the subscription of the share capital, i. e. the commitment of the shareholders to pay their contributions of a value at least equal to the nominal value of the shares, assumed by them, is a formation requirement for the AE. The payment of the capital, on the contrary, occurs mostly after the AE’s formation at the time, stipulated by the founders in the statutes.

54

55

56

318

About the cancellation of shares, see below under II.4. a), referring to the partial payment of capital. L. D. 400/1970, P. D. 350/1985, Decision of the Capital Market Commission 2/305/ 18. 06. 2004 (Gov.Gaz. 360 /B/03. 09. 2004) etc. See under II.2. a) cc).

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The AE’s share capital may be paid in full or in part (art. 8 par. 1 sec. 1), depending on 46 the relevant provision of the statutes about the way of the capital’s payment (art. 2 par. 1 sub. d). If the statutes provide for the full payment of the subscribed share capital, this must be effected the latest within two (2) months after the AE’s registration in the MAE57 (art. 11 par. 1) through deposit by the shareholders of the price of the shares, assumed by them, in the AE’s bank account (art. 11 par. 6) or through delivery of the in kind contributions to the AE.58 The AE’s statutes may freely specify the day of payment within the above-mentioned two-month period of time or even order that such payment must occur before the company’s formation, e. g. during or even before the company’s registration in the MAE. Partial payment of the share capital is the payment by the shareholder at the time of the 47 AE’s formation or upon every capital increase of a part only of the nominal value of the share(s), assumed by him, with the simultaneous commitment to pay the balance of the share’s value at a later stage, according to the provisions of the statutes. The possibility of partial payment refers only to contributions in cash and in no case to contributions in kind, which must, therefore, be paid up in full (art. 12 par. 1). Once the partial payment of the share capital is provided for expressly by the statutes, the following requirements must be, in addition, fulfilled (art. 12 par. 2 L. 2190/1920): – The nominal value of the assumed share(s) must be paid up within ten (10) years after the AE’s formation. – The part of the share’s value, paid at the time of the AE’s formation, may not be less than one quarter () of the share’s nominal value and the paid up part of the AE’s share capital must be in any case at least equal to the minimum amount of EUR 60,000,– (art. 8 par. 1 sec. 2). In the case of issuance of shares above par, i. e. above their nominal value, such difference must be paid up in full at once with the payment of the first instalment. – Until fully paid up, the shares must be registered (nominative shares). – The transferor of not fully paid up share(s) is held jointly liable with the transferee (new owner) for the payment of the part of such share(s), which is still due, for a period of two (2) years from the date of entry of such transfer in the company’s records.59 – The relevant provisions of the law and the statutes about the partial payment of capital must be stated on the reverse side of each share certificate, so that the persons, acquiring the shares, may be aware of the exact obligations, deriving from them. – Whenever the nominal share capital of the AE appears on any printed material, advertisement, publication or other document of the company, the amount of the paid up share capital must necessarily appear directly after it. 57 58

59

See above under II.2. a) ee) (1). If the contributions (in cash /in kind) have not been paid (placed at the AE’s disposal) in full within two (2) months after the company’s registration in the MAE, the Prefect, who ascertains this fact on the basis of the resolution of the BoD on the verification of payment or not of the share capital, revokes the administrative decision, establishing the AE (art. 11 pars. 1 and 5, art. 48 par. 1 sub. a L. 2190/1920). See below under II.5. b) aa).

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Greece

II. Company Limited by shares – Anonimi Etairia (AE)

– No increase of capital may be decided prior to the publication of the invitation, addressed to the shareholders, to pay the last instalment of the value of their share(s), unless the capital increase is imposed by a law provision. 48 If the shareholders fail to pay the part of the value of their shares due within the period of time, set forth by the AE by means of a general written invitation to be published in at least two (2) daily newspapers, such shares are cancelled and the company must proceed to the sale, effected by the Athens Stock Exchange, of new shares equal to the amount of the cancelled ones. In case of failure of the AE’s attempts (at least two) to sell the shares, it must proceed to the reduction60 of its share capital to the amount of the unsold shares, as the law provides (art. 12 par. 2 sub. e L. 2190/1920). b)

Contributions in cash and in kind

49 The founders of the AE may agree upon the kind of contributions to be paid by them or other shareholders, which may be either in cash or in kind or both and lay down in the statutes the number of shares to be paid in cash or /and in kind respectively and in the case of direct subscription of the share capital by the founders, the value of the in kind contributions on the basis of the valuation report. Should the statutes contain no provision about the kind of contributions to be paid, these are in cash contributions.61 50 In respect of in kind contributions, the law accepts only those, which may be evaluated in cash, such as contributions consisting in the transfer or assignment of the right to use real estate, buildings, piece of machinery or furniture, vehicles, negotiable securities as well as intangible assets, such as patents, copyrights, know-how etc. By way of exception, claims, deriving from a contract of execution of work or provision of services, may not constitute contributions in kind (art. 8 par. 5 L. 2190/1920). As already mentioned, in kind contributions must be paid up in full and they are subject to a previous valuation, effected by the competent Prefect and based on a Valuation Report, which is prepared by an independent Three Member Committee of Experts (art. 12 par. 1 sec. 2, art. 9 L. 2190/1920). The valuation report, which causes additional costs to the AE, is further subject to the publication requirements of art. 7b, i. e. registration in the MAE and publication in the Government Gazette (art. 9 par. 6 L. 2190/1920) on the initiative of the administrative authority. c)

Capital increase

51 The share capital of an AE may be increased by means of – new contributions, – capitalization of reserves or profits or – conversion of bonds into shares and exchange of founders’ titles for shares

60 61

320

See below under II.4. d). The law provides for special AE, e. g. banks, that their whole share capital must be paid up in cash.

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mostly upon resolution of the (exceptional or common) General Meeting of shareholders or of the Board of Directors. In particular, the exceptional General Meeting of shareholders may increase the AE’s 52 share capital without any restrictions by a resolution,62 adopted by the qualified quorum and majority (shareholders, representing 2/3 of the paid up share capital, majority of 2/3 of the represented votes, arts. 29 par. 3 and 31 par. 2). Such capital increase constitutes an amendment of the AE’s statutes (art. 34 par. 1 sub. a) and is, therefore, subjected to all formalities, accompanying the amendment of the statutes63 (administrative decision, approving the resolution of the GM (art. 4 par. 2) – registration of the administrative decision together with the (new) text of the statutes in the MAE – publication of the respective announcement in the Government Gazette, arts. 7a par. 1 sub. b and 7b par. 11). The exceptional GM is the only competent organ to decide the capital increase and the amendment of the relevant article of the statutes, when the AE’s reserves exceed one quarter (1/4) of the paid up share capital (art. 13 par. 4 sub. a L. 2190/1920). aa)

Capital increase by means of new contributions

(1)

Capital increase by resolution of the common GM of shareholders

The common General Meeting of shareholders may increase the share capital in whole 53 or in part, ordering the issuance of new shares, by a resolution, passed with the common quorum and majority (shareholders, representing at least 1/5 of the paid up share capital, absolute majority of the represented votes, arts. 29 par. 1 and 31 par. 1) only under the following conditions (art. 13 par. 2 L. 2190/1920): – if the GM is so authorized by the company’s statutes, – the increase is resolved within the first five (5) years after the company’s formation,64 – the capital may be increased in total up to five times (5x) the initial share capital. In that case, the capital increase does not constitute an amendment of the statutes 54 (art. 13 par. 4 sub. b) and the respective GM’s resolution is, therefore, not subject to an administrative approval, but only to publication, which has a declaratory character (registration in the MAE, publication of the announcement in the Government Gazette, art. 7a par. 1 sub. e, art. 7b L. 2190/1920). (2)

Capital increase by resolution of the Board of Directors

Parallel to the authority of the common GM of shareholders (art. 13 par. 4 sub. c), the 55 AE’s Board of Directors may increase the company’s share capital in whole or in part through the issuance of new shares by a resolution, taken by a majority of at least two third (2/3) of the total of its members, only if (art. 13 par. 1 L. 2190/1920): 62

63 64

In case of several classes of shares, the consenting resolution of the special meeting of class or classes of shareholders is required (art. 13 par. 8 L. 2190/1920). See below under II.6. b). It is meant: after the registration in the MAE of the administrative decision, establishing the AE.

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Greece

II. Company Limited by shares – Anonimi Etairia (AE)

– it is so authorized either by the company’s statutes or by a resolution of the exceptional GM of shareholders (arts. 29 par. 3 and 31 par. 2), which is subject to publication (art. 7b), – the increase is decided by the BoD within the first five (5) years after the company’s formation or after the date of its authorization65 by the GM, – the capital is increased to an amount, not exceeding the initial share capital, if the BoD is authorized by the statutes or up to the amount of the share capital, paid up at the date of the BoD’s authorization by the exceptional GM. 56 Such capital increase constitutes also no amendment of the statutes and the respective resolution of the BoD is, therefore, subject only to the publication requirements (arts. 13 par. 4 sub. b, 34 par. 2 sub. a, 7a par. 1 sub. e, 7b L. 2190/1920). 57 A resolution on the capital increase by means of new contributions, irrespective of the organ adopting it, must state the amount of the capital increase, the way of its subscription and payment (in cash or in kind contributions, full or partial66 payment of in cash contributions), the number and kind of shares (bearer or registered) to be issued, their nominal value, issuance price and the time limit for the capital’s subscription (arts. 13 par. 5 sec. 1, 7a par. 1 sub. e). In particular, the subscription of the amount of increase, i. e. the assumption of the new shares issued, is effected either by the AE’s already existing shareholders, who have a pre-emption right or by other persons, who are willing to assume shares of the concrete AE, in order to become its shareholders, in return of in cash or in kind contributions.67 In cash contributions are paid by the shareholders into the AE’s bank account, while both in cash and in kind contributions must be paid (placed at the AE’s disposal) within the period of time, specified by the respective resolution, which may be no shorter than one68 (1) month and no longer than four (4) or five69 (5) months from the date, the resolution on the capital increase was taken (art. 11 pars. 3, 4 and 6). The BoD is obliged to verify the payment or not of the amount of increase within one (1) month after the lapse of the time limit, set forth for the payment of the amount (art. 11 par. 2) and submit twenty (20) days after the lapse of that month a copy of the minutes of its session to the Prefect (art. 11 par. 5). Should the amount of capital increase not be subscribed in full, the share capital will be increased only up to the amount subscribed, if this possibility 65

66

67

68

69

322

The authority of the BoD may be renewed by a resolution of the exceptional GM (art. 29 par. 3), subject to publication (art. 7b), for a period of time, not exceeding five (5) years for every renewal, the validity of which commences after the lapse of each five-year period (art. 13 par. 1 sub. c L. 2190/1920). In case of partial payment of in cash contributions, the restrictions of art. 12 par. 2 L. 2190/ 1920 (see above under II.4. a)) apply accordingly. In case of in kind contributions, they are subject to valuation according to art. 9 L. 2190/1920. See above under II.4. b). Or fifteen (15) days in the case of AE, which have their shares listed on the Athens Stock Exchange. If the capital increase is accompanied by the amendment of the relevant article of the statutes, such time limit starts from the day, the GM’s resolution was taken and may be extended by the BoD for one (1) additional month.

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is explicitly provided for by the resolution on the capital increase (art. 13a par. 1). In that case and if the capital increase is resolved by the exceptional GM of shareholders, the company’s statutes must be anew amended (to the effect that the amount of increase subscribed is stated in them) by a resolution of the GM, adopted within two (2) months after the verification, effected by the BoD (art. 13a pars. 2 and 3 L. 2190/ 1920). (3)

Pre-emption right

In the case of capital increase by means of in cash contributions, shareholders of the AE, 58 existing at the time, the respective resolution on the capital increase is taken, have a pre-emption right70 to participate in the entire new capital in proportion to their participation in the existing share capital (art. 13 par. 5 secs. 2-7 L. 2190/1920). The AE’s organ, resolving the capital increase, lays down71 in the same resolution the time limit for the exercise of the pre-emption right, which may not be shorter than one (1) month (or fifteen (15) days, if such right derives from shares, listed on the Athens Stock Exchange) from the date, the respective resolution is taken. An invitation, addressed to the shareholders for the exercise of the pre-emption right, stating at the same time the time limit, must be published in the Bulletin of AE and EPE of the Government Gazette, unless all shares of the company are registered, in which case, instead of the publication, a registered letter “receipt requested” is sent to every shareholder. In any case, if shareholders, representing the total share capital, are present at the General Meeting, which resolves the capital increase and are, therefore, informed about the time limit for the exercise of the pre-emption right or they state their decision on the exercise or not of the pre-emption right during the meeting, both the invitation and the specification of a time limit may be omitted. Each shareholder exercises his preemption right by a written statement, addressed to the AE or to the underwriter (intermediary bank or other financial institution),72 in which he declares his intention to assume new shares (up to a percentage corresponding to the number of shares, he already holds) and by signing the respective assumption contract. After the end of the time limit for the exercise of such right, shares, which have not been assumed by the old shareholders, are disposed of freely by the BoD or the intermediary bank to any person (individual or corporation), willing to acquire shares of the concrete AE.

70

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72

Such pre-emption right may be restricted or cancelled in respect of all or some shares by a resolution of the exceptional GM of shareholders (arts. 29 par. 3, 31 par. 2), subject to publication (art. 7b), on the basis of a written report of the BoD and if the AE’s interests impose the adoption of such measure (art. 13 par. 6). If the respective organ fails to specify the time limit for the exercise of the pre-emption right in its resolution on the capital increase, such time limit or its extension is determined by the BoD (art. 13 par. 5 sec. 4, art. 11 par. 3). An AE may entrust the implementation of the capital increase (invitation for the exercise of the pre-emption right to the old shareholders, conclusion of the assumption contracts etc.) to an underwriter (bank or other financial institution), which carries out the respective acts on behalf of the AE (art. 13 par. 7 L. 2190/1920).

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bb) Capital increase by means of capitalization of reserves and profits

59 The increase of the share capital by means of capitalization of the company’s reserves or profits constitutes merely a “nominal” increase, i. e. the AE’s share capital is increased only as an accounting size and it is so adjusted to the real value of the company’s assets, which is higher than the capital. Such increase is effected either by the issuance of new shares to be distributed to the existing shareholders in proportion to their participation in the existing share capital without return or by means of an increase in the nominal value of the old shares also without return. 60 An increase in the AE’s capital through capitalization of reserves may be resolved either by the exceptional General Meeting of shareholders (arts. 29 par. 3 and 31 par. 2), amending the company’s statutes or, if the statutes provide so, by the common General Meeting of shareholders or by the Board of Directors (art. 13 pars. 1 and 2, applying analogically). In the latter case, the ordinary GM of shareholders must approve the capitalization of reserves, resolved by the BoD, in its session concerning the approval of the balance sheet of the previous fiscal year. The AE is prohibited from capitalizing its regular legal reserve73 (art. 44), predestined to cover the company’s losses as well as legal reserves, formed according to the law, in order to be used for a special purpose, such as the “reserve for own shares”, provided for in art. 42e par. 13 L. 2190/1920. The re-adjustment of the value of certain items of the company’s fixed assets may be effected by the AE, only if special legislation allows it (art. 43 par. 9). Notwithstanding these restrictions, the company is free to capitalize its extraordinary legal reserves, such as those formed through the issuance of shares above par. 61 The AE has the possibility to capitalize its profits, but only after the deduction of 1/20 out of them for the formation of the regular legal reserve (art. 44, art. 45 par. 2 sub. a). Beyond such restriction, the capitalization of non-distributed profits may be effected according to the provisions of art. 3 C. L. 148/1967. In particular, the GM of shareholders may resolve by a majority of at least 65% of the paid up share capital that a first dividend, equal to at least 35% of the profits, will not be distributed to the shareholders, but it will be transferred to a special account of a reserve, in order to be capitalized. In that case, the AE is obliged to capitalize such reserve within four (4) years after its setting up by issuing new shares to be delivered to the entitled shareholders without return. Moreover, the exceptional GM of shareholders (arts. 29 par. 3 and 31 par. 2) may resolve that, instead of the distribution of an additional dividend, profits remaining after the distribution of the first dividend will be allocated for the increase of the share capital through the issuance of new shares, also granted to the shareholders without return (art. 45 par. 3 L. 2190/1920).

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See below under II.9. c).

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Capital increase by means of conversion of bonds74 into shares and exchange of founders’ titles75 for shares The AE may increase its capital by capitalizing its liabilities. By doing that, it does 62 cc)

not acquire new financial means, but it is released from its obligation to pay up its debts and the rate of interest, accompanying such debts. In particular, in the case of issuance by the AE of a debenture loan with the right of the bondholders to convert their bonds into shares of the AE (art. 3a L. 2190/1920, as amended by L. 3156/2003), each bondholder exercises his right of conversion mostly by means of a written statement, addressed to the AE and by signing the contract of assumption of the shares. Consequently, the AE issues shares of a nominal value, corresponding to the issuance price of the converted bonds and hands over the share certificates to the holders of the converted bonds in return of bonds. The exercise of the conversion right has as a consequence the increase of the AE’s share capital to an amount equal to the nominal value of the shares issued, while no new resolution is required for such increase, since this is incorporated in the resolution of the respective organ, which has decided the issuance of bonds convertible into shares (art. 3a par. 1). Until the end of the month following the date of exercise of the respective conversion right, the BoD must verify the capital increase and re-adjust the article of the company’s statutes concerning the capital accordingly, fulfilling the publication requirements of art. 7b. Such capital increase does not constitute an amendment of the statutes (art. 3a pars. 4 and 5 L. 2190/1920). A capital increase on the basis of exchange of founders’ titles (art. 15 L. 2190/1920) for 63 shares may be resolved only by the exceptional GM of shareholders (arts. 29 par. 3 and 31 par. 2), because it constitutes an amendment of the AE’s statutes, which lay down the conditions (price etc.) of the buying out of holders of founders’ titles by the AE (art. 15 74

75

Bonds (“omologies”) are negotiable securities, which are issued by the AE and grant to their holders a claim against the company for the payment at a certain future date of a fixed sum of money plus stated interest, in return for money lent by them to the legal entity. The L. 3156/ 2003 (Gov.Gaz. A’ 157/25. 06. 2003) stipulates four classes of debenture loans, a Company Limited by shares has the option to issue: the common debenture loan (art. 6 L. 3156/2003), the debenture loan with exchangeable bonds (art. 7 L. 3156/2003), the debenture loan with bonds convertible into shares (arts. 8 L. 3156/2003 and 3a L. 2190/1920) and the debenture loan with the right of participation in the company’s profits (arts. 9 L. 3156/2003 and 3b L. 2190/1920). The founders’ titles (“idritikoi titloi”) constitute a special type of security, granted by the AE either to its founders as a reward for their efforts during the company’s formation (“common founders’ titles”, art. 15 pars. 1-4) or to persons, who contributed to the AE, during its formation or operation, certain items (non cash contributions), which do not represent a part of the share capital (“exceptional founders’ titles”, art. 15 par. 5) and only under certain conditions (respective agreement at the time of the AE’s formation, explicit provision in the statutes, number of founders’ titles not exceeding 1/10 of the number of the shares issued). Such titles have no nominal value and do not embody a share relationship, but they merely accord to their holders the right to receive a part of the AE’s net profits (1/4 for the founders), remaining after the necessary deductions (regular reserve, first dividend). The legal entity retains the right to buy out and cancel such titles under the conditions of art. 15 par. 4 L. 2190/1920.

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par. 4). Such titles are subject to valuation (art. 9 L. 2190/1920), in order to be replaced by share(s), equal to them in value. dd) Stock option programme

64 By a resolution of the exceptional GM of shareholders (arts. 29 par. 3 and 31 par. 2) a stock option programme may be established for the members of the BoD, the company’s personnel and the personnel of its affiliated companies (art. 42e par. 5), consisting in the right (option), provided to these persons, to purchase shares of the AE in accordance with the terms of the resolution, a summary of which is subject to the publication requirements of art. 7b. The resolution must lay down the maximum number of shares to be issued, which may not exceed one tenth (1/10) of the shares already issued, the purchase price as well as the terms of purchase of the shares by the right-owners. The BoD specifies by a resolution other relevant details, not regulated by the GM, issues the right-certificates as well as in the month December of each year the shares for the option-holders, who have exercised their right, increases the company’s capital accordingly and certifies such capital increase (art. 11), which does not constitute an amendment of the statutes (art. 13 par. 9 L. 2190/1920).

d)

Capital reduction

65 The reduction of the AE’s share capital may be either a “real” or a “nominal” (accounting) one. “Real” capital reduction occurs, when parts of the company’s excess property are freed and are either distributed to the shareholders (return76 to the shareholders of a part of their original contributions or remission of the shareholders’ obligation to pay up the value of their shares) or set aside for the formation of free reserves. A “nominal” or “accounting” capital reduction, on the contrary, aims at the adjustment of the company’s share capital to the actual value of the AE’s assets, which have been diminished by losses. It constitutes a measure leading to the company’s sanitation in the case of its failure to distribute profits to the shareholders. In that case, the reduction of the share capital is usually followed by an immediate capital increase by means of new contributions. The capital reduction constitutes always an amendment of the statutes (art. 34 par. 1 sub. a) and the requirements thereof (art. 4 pars. 3-5 L. 2190/1920) are the following: – The share capital may not be reduced to an amount less than EUR 60,000,– (minimum limit of capital required by the law, art. 8 par. 2), unless the GM’s resolution on the reduction provides for the simultaneous increase in capital at least up to the minimum limit of EUR 60,000,– (art. 8 par. 6 L. 2190/1920). – The exceptional GM of shareholders is the AE’s competent body to decide the capital reduction (arts. 29 par. 3 and 34 par. 1 sub. a) by a resolution, adopted with the qualified quorum (of shareholders, representing 2/3 of the paid up share capital, art. 29 par. 3) and majority (of 2/3 of the votes, represented at the meeting, art. 31 par. 2). If several classes of shares exist, such resolution of the GM is subject to the

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Such return consists either in the payment to the shareholders of cash or in the transfer to them of items of the AE’s assets.

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approval of the class or classes of shareholders, whose rights are affected by it (art. 4 par. 5). The invitation for the convocation of the GM as well as the GM’s resolution must, under the penalty of nullity, specify the purpose of such reduction and the way this shall be realized. Besides that, the GM’s resolution must be accompanied by a report of a Chartered Accountant, certifying the company’s ability to satisfy its creditors, unless the resolution provides for the simultaneous increase in capital at least at an equal amount and the full payment of this amount or if the reduction in capital is effected as an offset of damages or is required by law (art. 4 par. 3 L. 2190/1920). – The resolution of the GM on the capital reduction is, further, subject to the approval of the administrative authority (Prefect), which is obliged not to render it, if, on the basis of the Chartered Accountant’s report, it considers that, in the case of capital reduction, no sufficient guarantees will remain for the satisfaction of creditors (art. 4 par. 3). – The GM’s resolution and the administrative approval must, finally, like every amendment of the statutes,77 be registered in the MAE and published in the Bulletin of AE and EPE of the Government Gazette (art. 7a par. 1 subs. b and e and art. 7b). – For the protection of the company’s creditors, the law (art. 4 par. 4) provides that, under the penalty of nullity, no payment whatsoever shall be made to the shareholders out of the company’s assets freed by means of a capital reduction, unless the claims of the company’s creditors, arising prior to the publication of the GM’s resolution on the capital reduction, are satisfied or the Court rules that such claims are unsubstantiated. The capital reduction is effected either by means of reduction of the nominal value of 66 the shares, under the condition that after such reduction each share will not have a nominal value of less than EUR 0,30 (art. 14 par. 1); or by consolidation of several shares into one of a nominal value less than the cumulative nominal value of the several shares (cancellation of shares); or by acquisition by the AE of its own shares in accordance with art. 16 par. 2 sub. a.78 In the latter case, the own shares must be cancelled immediately (art. 16 par. 3).

5.

The AE share

The term “share” has a multiple meaning: it means not only a) the smallest unit, into 67 which the share capital of an AE is divided (art. 34 Commercial Law), but also b) the personal “partner-relationship” between the company and each shareholder, from which derives a number of rights and duties for both parties and c) the share certificate as document (negotiable security), which embodies the “partner relationship”.

77 78

See below under II.6. b). See below under II.5. c) bb).

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68 The shareholders have a claim against the AE for the issuance of share certificates, while such issuance has merely a declaratory character.79 In practice, provisional titles are usually issued and delivered to the shareholders until the issuance of the final share certificates. Each certificate may incorporate more than one shares, held by one and the same shareholder (art. 11a par. 1). Once issued, the exercise of the rights deriving from the share and its transfer require the possession80 of the share certificate by the shareholder, unless the company proves that the person, possessing the share, is not its owner. The share as a negotiable security stands out due to its large marketability and it may be the object not only of ownership, but also of usufruct and pledge (arts. 1176-1177, 1244-1245 C. C., art. 30a L. 2190/1920). Since the split of shares into sub-shares is prohibited, in case of co-ownership of shares (e. g. inheritance by more than one persons), the provisions about the exercise of undivided joint rights (arts. 1113, 785 ff. C. C.) apply analogically, unless the co-owners designate a common representative to the AE. 69 Each share as a unit, into which the capital is divided, has a nominal value, specified mandatorily in the company’s statutes (art. 2 par. 1 sub. e), which, however, may not be less than EUR 0,30 and higher than EUR 100,– (art. 14 par. 1 L. 2190/1920). The issuance of shares at a value lower than their nominal one is prohibited by the law, because this would present a fictitious image of the AE’s financial situation. The contrary (issuance of shares above par, i. e. at a value higher than the nominal one) is permitted, but the balance deriving therefrom may not be used for the payment of dividends or other percentages (art. 14 pars. 2 and 3 L. 2190/1920). a)

Classes of shares

70 The main classes of shares are: a) bearer (anonymous) shares, b) registered (nominative) shares, c) preferred (privileged) shares and d) redeemed shares. The issuance of shares “to the order” is prohibited (arts. 68 par. 2, 76 L. D. 17. 07./13. 08. 1923). The kind of shares (bearer /registered) to be issued by the AE and the number of shares of each class, if several classes of shares (common, preferred) exist, are specified in the AE’s statutes (art. 2 par. 1 subs. e and f L. 2190/1920). aa)

Bearer and registered shares

71 In respect of bearer (anonymous) shares issued by the AE, the certificates of such shares do not designate the name of the holder, but include only the words “Bearer Share” or “to the Bearer”. Registered (nominative) shares, on the contrary, indicate directly on the face of the certificate the entitled shareholder (first name, surname, nationality, occupation, place of residence, numbers of identity card and tax register accordingly).

79

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Independent of the issuance of share certificates, a person acquires the shareholder identity, as soon as he assumes the shares of the AE or the transfer of the share (heir legitimation etc.) is entered into the AE’s records. Presumption of art. 1110 Civil Code: “The possessor of a moveable item is presumed to be its owner, a presumption to be invoked even against the previous possessor of the bearer title, who lost it or from whom the title has been stolen”.

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By way of exception, the law81 requires that the shares of an AE are “registered” in the following cases: partially paid shares,82 blocked shares83 as well as in the case of AE operating certain activities, such as banks, insurance, railway and airline AE, AE engaged in the production of gas, generation and distribution of electricity, water supply and sewage systems, telecommunications, radio broadcasting, production of war material of any kind, athletic AE etc. The statutes may, further, provide for the possibility of conversion of registered shares into bearer and vice versa under certain conditions e. g. pursuant to a resolution of the GM (art. 2 par. 1 sub. g L. 2190/1920). Concerning bearer or registered shares of an AE listed on the Athens Stock Exchange,84 72 no share certificates are issued for these shares, but they are registered in the Archive of the Central Depository AE (“dematerialized” shares, introduced by the L. 2396/1996, arts. 39 ff.) bb) Preferred shares

Preferred (privileged) shares are those rendering to their holders, apart from all the 73 rights granted by the common shares, certain privileges. They are issued by the AE in its attempt to attract the attention of so many investors as possible either during its formation or even at a later stage, i. e. in case of capital increase or conversion of common shares into preferred and only under the condition that the AE’s statutes permit the issuance of such shares. Preferred shares are, further, distinguished into preferred shares “with voting right” and those “without voting right”. Their certificates must differ expressly from those of the common shares by bearing on their front side and in large type the words: “Preferred shares” and their main characteristics, e. g. “bearer” or “registered”, “convertible”, “with” or “without voting right” and on their reverse side a notice, concerning the extent and conditions of the privilege(s) granted (art. 3 par. 6 L. 2190/1920). More specifically, privilege(s), stipulated in the company’s statutes and conferred on 74 holders of preferred shares with voting right may be (art. 3 pars. 1 and 2 L. 2190/1920): – the receipt of the first dividend (art. 45) prior to the holders of common shares, – the preferential repayment of their contributions out of the proceeds of liquidation, – the receipt of dividends for fiscal years, during which no dividends were distributed, – the receipt of a fixed dividend and/or – the participation in whole or in part in the company’s profits. Preferred shares with voting right may be issued as convertible into common shares, in 75 which case the time of conversion is specified in the statutes or in the respective

81

82 83 84

L. 2190/1920 (arts. 12 par. 2 sub. c, 11a par. 2) and other special laws, such as L. 1746/1988, L. 1958/1991, L. 2214/1994, L. 2367/1995 etc. See above under II.4. a). See below under II.5. b) cc). P. D. 350/1985. About the transfer of such shares, see below under II.5. b) bb).

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resolution of the General Meeting. The conversion right is exercised by the privileged shareholder individually by means of a statement, addressed to the AE in writing. The conversion is valid as from the next financial year following the one, during which the right has been exercised (art. 3 par. 3 L. 2190/1920). 76 Preferred shares without voting right accord to their holders apart from all the rights and privileges, rendered by preferred shares with voting right (except for the voting right), the right to receive a certain amount of interest, but only under the condition that the statutes provide so and the AE’s equity at the end of the respective financial year exceeds the amount of the paid up share capital, increased by the amounts of nondistributable reserves (art. 3 par. 4, referring to art. 44a). These shares may be converted into common shares with voting right, the conversion requiring: a resolution of the holders of such shares, adopted at a special meeting and a consenting resolution of the GM of holders of common shares. In that case, the required quorum and majority for the meetings are: a quorum of shareholders, representing three quarters (3/4) of the paid up privileged or common share capital and a majority of three quarters (3/4) of the represented privileged or common share capital. The cancellation or limitation of privilege(s) is only possible upon a consenting resolution of the shareholders, whose privileges are affected, taken at a special meeting with the aforementioned quorum and majority percentages (art. 3 par. 5 L. 2190/1920). cc)

Redeemed shares

77 “Redeemed” shares are issued by the AE in the case of a total or partial capital redemption (art. 15a L. 2190/1920), resolved either by the common GM of shareholders (arts. 29 par. 1 and 31 par. 1), if it so authorized by the company’s statutes or by the exceptional GM (arts. 29 par. 3 and 31 par. 2), if the possibility of a capital redemption is not provided for by the statutes. 85 In any case, the respective resolution of the GM (common or exceptional) must be subjected to the publication requirements of art. 7b. The redemption of the AE’s share capital is effected by means of payment to the shareholders of the total or part of the nominal value of their shares out of the company’s special reserves formed for this purpose or out of amounts subject to distribution (arts. 44a and 45). Such payment constitutes neither a capital reduction nor a return to the shareholders of the proportion of their shares to the capital. Instead of the shares redeemed, new titles are issued and delivered to the shareholders, called “redeemed shares” or “shares of usufruct”. The holders of redeemed shares enjoy all the rights of the common shares, except for the right of repayment of their contributions and the right to participate in the distribution of the first dividend (art. 45 L. 2190/1920). b)

Transfer of shares

78 Shares are transferred by the old shareholder (transferor) to the new one (transferee) either inter vivos (between the living) by means of a contract of sale, donation, parental provision, exchange etc. or mortis causa (in contemplation of death) by means of

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330

About the quorum and majority percentages of the common and exceptional GM of shareholders, see above under II.3. b) cc) (1).

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inheritance. The mode of the contractual transfer of shares of an AE varies, depending on whether the shares (bearer or registered) are listed on the Athens Stock Exchange or not. Bearer and registered shares not listed on the Athens Stock Exchange86 Both bearer and registered shares of the AE not listed on the Athens Stock Exchange 79 aa)

are transferred by a) an agreement between the transferor and the transferee on the assignment of ownership, which has to embrace the form of a notarial deed87 or private document, countersigned by the competent Public Financial Authority88 (art. 79 par. 4 L. 2238/1994, added by art. 15 par. 3 L. 2459/1997) and b) delivery of the share certificate to the new shareholder (arts. 1034, 1039 C. C.). However, for the transfer of registered shares to be effective with regard to the AE, the law (art. 8b par. 1 L. 2190/ 1920) provides an additional requirement: the registration of the transfer in the Book of Shareholders, kept by the AE, such registration being dated and signed by the transferor and the transferee or their proxies. After each transfer a new share certificate is issued by the AE or the transfer is simply marked by the AE on the reverse side of the old share certificate together with the names, addresses, occupations and nationalities of both transferor and transferee and is handed over to the new shareholder. In the case of transfer of registered shares mortis causa, the heir or legatee requests from the AE the entry of the transfer into the Book of Shareholders, by submitting to it his authorization documents together with the certificate of the competent Public Financial Authority (art. 6 par. 2 L. D. 3330/1955). In any case of transfer of registered shares and as far as the AE is concerned, the person, whose name appears in the Book of Shareholders, is deemed to be the lawful shareholder of the AE (art. 8b par. 1 L. 2190/1920). bb) Bearer and registered shares listed on the Athens Stock Exchange89

The transfer of dematerialized bearer or registered shares listed and traded on the 80 Athens Stock Exchange occurs according to the rules governing the stock exchange 86

87

88

89

See Antonopoulos V., I metabibasi ton mi eisigmenon sto Chrimatistirio metochon anonimon etairion (The transfer of shares of Companies Limited by shares not listed on the Stock Exchange), Arm. 2001, 152; Palazis G., I metabibasi onomastikon i anonimon metochon mi eisigmenon sto Chrimatistirio Axion Athinon (The transfer of registered or bearer shares not listed on the Athens Stock Exchange), Arm. 2001, 1591. The notary fees for a contract of transfer of shares are calculated on the basis of that value of the shares transferred (true value, nominal value, purchase price), which is higher. The presence of an attorney, who prepares the draft of such contract is compulsory, if the value of the shares transferred exceeds the amount of EUR 29,347,03 for the districts of the Bar Associations of Athens and Piraeus and EUR 11,738,81 for the districts of the other Bar Associations of the Greek State. The content of the notarial deed or private document as well as the process of its countersignature by the Public Financial Authority are provided for by the M. D. 1056431/10479 / B0012 /Pol. 1169/1997 (Gov.Gaz. B’ 479/11. 06. 1997). See Nikas N./Tamamidis A., Zitimata ousiastikou kai dikonomikou dikaiou apo ti metabibasi onomastikon metochon eisigmenon sto X. A. A. (Questions of substantial and procedural law in respect of the transfer of registered shares listed on the Athens Stock Exchange), Arm. 2004, 802.

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transactions. The transfer is valid from its registration in the Archive of the Central Depository AE90 (arts. 42, 43 L. 2396/1996), which grants to the new shareholder a certificate about the number of shares he holds and, if any, the burdens (e. g. pledging) accompanying the share(s) (art. 51 par. 1 L. 2396/1996). Such certificate is not a negotiable security, but it only proves the person’s shareholder identity. The law (art. 46 L. 2396/1996) accepts, further, the possibility of transfer of dematerialized shares outside the scope of the stock exchange trading, i. e. privately by means of a notarial deed or a written private agreement, in which the signatures of the contracting parties are authenticated. In such case, the transferor must previously notify to the Central Depository AE his intention to transfer his shares and proceed to the transfer (sale etc.) within thirty (30) days after the receipt of his statement by the Depository AE (art. 48 L. 2396/ 1996). In respect of dematerialized registered shares and as far as the AE is concerned, shareholder of the AE is deemed to be the person, whose name is registered in the Archive of the Central Depository AE (art. 47 L. 2396/1996). cc)

Blocked shares

81 Blocked shares are registered shares, the transfer of which is subject to the approval of the AE, rendered either by the GM or the BoD according to the provisions of the statutes, which may, further, specify the reasons, for which such approval may be denied (art. 3 par. 7 L. 2190/1920) and even include additional restrictions concerning the transfer of such shares, such as the pre-emption right of the old shareholders etc. c)

Own shares

82 In general, the assumption, acquisition and receipt as a pledge by the AE of its own shares is prohibited (arts. 15b par. 1,16 par. 1 and 17 par. 1 L. 2190/1920). aa)

Prohibition of assumption of own shares

83 The AE is prohibited from acquiring its own shares even initially, i. e. through capital subscription. Should a third person assume shares of the concrete AE in his own name, but on the AE’s account, it is deemed that the person in question has assumed the shares on his own account. During the AE’s formation the founders and in the case of a capital increase the members of the BoD, who are liable due to any fault whatsoever, are obliged to pay to the company the value of the shares, which have been assumed in violation of the law provisions (art. 15b L. 2190/1920). bb) Prohibition of acquisition of own shares

84 An AE is, in principle, prohibited from acquiring its own shares either directly or through a person, acting in his own name, but on the company’s account (art. 16 par. 1). This prohibition safeguards the preservation of the AE’s assets, out of which persons

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The Central Depository AE, the sole shareholder of which is the Athens Stock Exchange, is a Company Limited by shares of a special purpose: a) the keeping of the Archive, in which every change concerning the status of the shares listed is registered and b) the granting to the shareholders of the respective certificates. About the operation of the System of Dematerialized Titles, see Decision 3/304/10. 06. 2004 (Gov. Gaz. 901 /B/16. 06. 2004).

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(shareholders and creditors), who have invested in it, can be satisfied. Nevertheless, this prohibition does not apply in respect of (art. 16 pars. 2 and 3 L. 2190/1920): – Shares acquired by the AE in view of a capital reduction, resolved by the GM of shareholders according to the relevant provisions of the statutes. Shares acquired by the company for this purpose must be cancelled immediately. – Shares acquired due to a universal transfer of property, e. g. inheritance, merger etc. and even if the acquired shares are not fully paid up. These shares must also be cancelled immediately. – Fully paid up shares acquired as a result of an enforced execution for the satisfaction of the AE’s claims against shareholders. Such shares must be sold within the shortest time possible, not exceeding one (1) year from their acquisition and if this time limit lapses without the shares having been sold, they must be cancelled immediately. – Banking AE, which acquire their own shares by order of third parties. – Fully paid up shares acquired as donations, which have to get sold by the AE within one (1) year from their acquisition; otherwise they must be cancelled. – Shares acquired for the purpose of their distribution to the AE’s personnel or to the personnel of an affiliated company (art. 42e par. 5). The distribution must be effected within a twelve-month time limit from their acquisition, after the lapse of which the shares must be sold within one (1) year or otherwise be cancelled. Such acquisition may be effected only under the following conditions: a) the nominal value of the shares together with the nominal value of shares, otherwise acquired by the AE, does not exceed one tenth (1/10) of the share capital; b) the acquisition of own shares will not result in the reduction of the total of the company’s equity to an amount less than the paid up share capital, increased by the non-distributable reserves (art. 44a par. 1); c) the shares to be acquired are fully paid up. – AE, the shares of which are listed on the Athens Stock Exchange (art. 16 pars. 514). Such companies may proceed, pursuant to a resolution of the common GM of shareholders (arts. 29 par. 1, 31 par. 1) to the acquisition of their own shares through the Athens Stock Exchange up to 10 % of the total of their shares. The purpose of such acquisition is the support of the stock exchange value of the company’s shares (especially) in the case it is deemed that the value in question is significantly lower than the value of the share(s) corresponding to the market data, the financial situation and the prospects of the concrete AE. If the acquired shares are not sold within three (3) years from the date of their acquisition or are not distributed in whole or in part to the AE’s personnel, they must be cancelled by a resolution of the GM of shareholders. In that case, the law imposes on the organs (BoD, GM) of such companies further obligations (notification of the resolution to the BoD of the Athens Stock Exchange, publication etc.) for the acquisition, sale or cancellation of own shares. The AE’s own shares are taken into account for the calculation of the GM’s quorum, but 85 the right to vote, attached to such shares, is suspended (art. 16 par. 4 L. 2190/1920).

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II. Company Limited by shares – Anonimi Etairia (AE)

86 An AE is prohibited from receiving its own shares or the shares of its subsidiaries as a pledge for securing loans granted by it or other claims of it. Nevertheless, this prohibition does not apply to the transactions of banks or other financial institutions in the normal course of their business. Moreover, subsidiary AE (as defined in art. 42e par. 5 L. 2190/1920) have no right to invest even a part of their own share capital in shares of the parent company (art. 17 pars. 1 and 2 L. 2190/1920). 87 The assumption, acquisition or holding of the shares of an AE by another Company Limited by shares or Company with Limited Liability or Limited Partnership by shares, in which the AE (the shares of which have been acquired) holds, directly or indirectly, the majority of the voting rights or on which it may, directly or indirectly, exercise a dominant influence, are considered to have been effected by the AE itself. This presumption applies also in the case, when the dominated company is subject to the law of a third country, non-member of the European Union and has a legal form comparable to the three company forms mentioned above (art. 17 par. 3). Voting rights of shares held on the AE’s account are suspended, but the shares are taken into account for the calculation of the GM’s quorum (art. 17 par. 4, referring to art. 16 par. 4 L. 2190/1920). 88 Departures from the application of the above presumption constitute the cases, where the assumption, acquisition or holding of shares of an AE is effected (art. 17 par. 5): – on behalf of a person other than the person assuming, acquiring or holding the shares and this person is neither the dominating AE nor the dominated company (art. 17 par. 3 L. 2190/1920), – by another company in its capacity and in the context of its activities as a professional dealer in securities, provided that this company is a member of a Stock Exchange, situated or operating within a Member State or it is approved or supervised by an authority of a Member State, competent to supervise professional dealers in securities, to which belong also the credit institutions or – by another company at a time, when the AE (the shares of which have been acquired) did not dominate over the acquiring company.

6.

The articles of association of the AE

a)

Mandatory content

89 The articles of association (statutes, “katastatiko”) as the fundamental instrument of the Company Limited by shares, which individualizes each company, must mandatorily contain provisions, specifying the following matters (art. 2 L. 2190/1920): – The company’s trade name (art. 2 par. 1 sub. a and art. 5 L. 2190/1920). It must state the kind of business, the AE conducts and include the words “Anonimi Etairia” (= Company Limited by shares) or the abbreviation “AE”. It belongs to the founders’ discretion to include in the AE’s trade name the name of a founder or of another natural person or even of another commercial company or add to it general expressions or other optional features, as far as the latter do not render the trade name inexact and misleading. If the AE’s purpose extends to many objects, the trade name 334

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may be derived from the main objects, while a future widening of the company’s purpose to other objects does not necessarily entail a change in the AE’s trade name, which has already been established in its current transactions. For the AE’s international transactions, its trade name may also be expressed in a foreign language in exact translation or in Latin characters. The company’s business object (art. 2 par. 1 sub. a L. 2190/1920). An AE may only be established for the carrying out of an object, which is legitimate and does not oppose to the principles of good faith and public order. It must be defined precisely and not only in respect of the “direction” of the company’s business, e. g. speculative, ideal or associative object, but, furthermore, in accordance with the concrete object of the company’s activities, e. g. film enterprise or car trade. General descriptions, such as “general trade” or “industrial business” are too vague and must be, therefore, replaced by an accurate elucidation of the AE’s object. The company’s registered office (seat) (art. 2 par. 1 sub. b L. 2190/1920). It must be established in one of the Municipalities or Communities of the Greek territory (art. 6 L. 2190/1920) and is the place, where the administration of the AE operates (art. 64 C. C.). The AE may have only one seat, but sometimes e. g. in the case of a branch, it may have at the same time a special “occupational” residence (art. 51 sec. 3 C. C., applying analogically to legal persons). If there is a discrepancy between the statutory and the “real” seat of the company, the latter one predominates.91 In any case, the competence of the Prefecture, in the Register (MAE) of which the company will be entered, is determined on the basis of the AE’s statutory seat (art. 7b par. 1 sub a). The duration of the AE (art. 2 par. 1 sub. c L. 2190/1920). The amount (minimum: EUR 60,000,–, art. 8 par. 2) and way of payment (full or partial payment, in cash or in kind contributions) of the share capital92 (art. 2 par. 1 sub. d L. 2190/1920). The kind of shares (bearer /registered), their number, nominal value, their issuance, conversion of registered shares into bearer shares and vice versa as well as, if several classes of shares (common, preferred) exist, the number of shares of each class (art. 2 par. 1 subs. e, f and g). The nominal value of each share may not be less than EUR 0,30 and higher than EUR 100,– (art. 14 par. 1 L. 2190/ 1920). The identity particulars of the founders (natural or legal persons), who sign the articles of association or in the name and on account of whom the articles of association are signed (art. 2 par. 2 sub. a L. 2190/1920). The total amount, at least approximately, of all the costs of the AE’s formation, which are chargeable to the company (art. 2 par. 2 sub. b L. 2190/1920).

Apart from the aforementioned minimum mandatory content of the statutes, the foun- 90 ders of an AE are free to include in them provisions upon matters, which, if not arranged by the statutes, are regulated by the respective law provisions. Such matters (art. 2 par. 1 subs. h-m L. 2190/1920) are:

91 92

See below under V. See above under II.4.

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convocation, composition, operation and authorities of the BoD and the GM, auditors, shareholders’ rights, balance sheet and the distribution of profits, dissolution of the company and the liquidation of its assets.

91 In arranging such matters, the AE’s founders may adopt the law provisions or introduce different regulations, under the condition that the introduced settlements do not oppose to provisions of mandatory law, governing the AE. The founders may even include in the statutes provisions about other matters, not regulated by the law, matters of importance for the commencement of the AE’s operation, such as provisions about the appointment of the first BoD or of the auditors or even agreements outside the scope of the AE’s operation, which have a contractual nature and bind only the contracting shareholders, e. g. about the exercise of the voting right in the GM of shareholders. This kind of agreements, which may be incorporated into an extra notarial deed, may be amended or annulled only by a later agreement of the contracting parties. b)

Amendment of the articles of association

92 The amendment93 of the articles of association consists either in the modification or annulment of one or more of their provisions or in the addition of new provisions. Nevertheless, the amendment of the statutes’ content is subject to certain restrictions, such as the prohibition of deleting provisions, which constitute the minimum mandatory content (art. 2) and the prohibition of introducing provisions opposite to the law. In addition, the founders of the AE may have included in the initial statutes or the GM of shareholders may have introduced, by means of an amendment, a provision in the company’s statutes, which prohibits in whole or in part a future amendment (art. 34 par. 1 sub. a sec. 2 L. 2190/1920). 93 The requirements for the amendment of the AE’s statutes (art. 4 par. 2 L. 2190/1920) are the following: – A resolution of the GM of shareholders to this effect. If the law does not provide otherwise, like e. g. in the case of capital increase or reduction,94 the resolution is adopted by the common GM with the common quorum and majority requirements (arts. 34 par. 1 sub. a, 29 par. 1 and 31 par. 1), unless the statutes provide that every amendment belongs to the authority of the exceptional GM of shareholders, in which case the qualified quorum of shareholders, representing 2/3 of the paid up share capital and the majority of 2/3 of the votes, represented at the meeting, are required for the adoption of a valid resolution on the amendment of the statutes (art. 29 pars. 3 and 5, art. 31 par. 2). A consenting resolution of the special meeting of preferred shareholders is, additionally, required, if the amendment of the statutes affects (cancels or limits) their privileges.

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The term “amendment” of the statutes may, further, mean: their “authentic” interpretation, the change of their formulation and their codification. See above under II.4. c) and II.4. d).

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– The amendment of the statutes must not necessarily embrace the form of a public document. – The resolution of the GM of shareholders on the amendment of the statutes must be submitted by the AE to the locally competent administrative authority (Prefect, representing the Minister of Development) for approval. – The administrative approval and the whole text of the statutes together with the effected amendments must be then registered in the Register of Companies Limited by shares (MAE) and an announcement thereof must be published in the Bulletin of AE and EPE of the Government Gazette on the initiative of the administrative authority and at the expenses of the AE (art. 7a par. 1 sub. b and art. 7b L. 2190/ 1920). The amendment of the statutes is effective only after the aforementioned registration in 94 the MAE. The new text of the statutes must be necessarily signed by the President of the BoD or his lawful substitute (art. 7b par. 11 L. 2190/1920).

7.

Board of Directors

The administration (management and representation) of the AE belongs to the author- 95 ity of the Board of Directors (BoD), which is the company’s collective executive organ (arts. 18 par. 1 and 22 par. 1 L. 2190/1920). The members of the BoD may not be less than three (3) (art. 21 par. 1) and do not acquire the merchant capacity through their identity as members of the AE’s BoD. The statutes specify the term of their office, which, however, may not exceed six (6) years (art. 19 par. 1). The Directors may be shareholders or not, individuals or even legal entities,95 as far as the statutes do not provide otherwise, and there are no distinctions concerning their nationality. They may always be re-elected and they are freely revocable (art. 19 par. 2 L. 2190/1920). The managerial competence of the BoD consists in the authority of its members, acting 96 collectively,96 to decide upon every action, concerning the management of the AE, the administration of its property and generally the implementation of its business object (art. 22 par. 1 sec. 1). The BoD realizes its resolutions by carrying out legal acts, by concluding contracts, accepting the declarations of will, addressed to the company, and generally by representing the AE in Court or extra judicially (art. 18 par. 1). Furthermore, it facilitates the operation of the GM of shareholders by causing its convocation, prepares the annual accounts, submits to the administrative authority the acts and data, subject to publication (art. 7b par. 14) etc. During the exercise of its authorities the BoD is obliged to follow the provisions of the law, the articles of association and the resolutions of the GM of shareholders. Restrictions of the BoD’s powers, imposed by the articles of association or by the GM, may not be invoked as against third parties, acting 95

96

In such case, the legal entity, e. g. another AE or EPE, entrusted with the task of directing the AE, exercises its powers and duties through its authorized natural representative. The “joint” action of the members of the BoD consists in the right of all its members to participate in the collective procedures, like the adoption of valid resolutions, and not in the obligatory participation of all its members in every act of the BoD.

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in good faith, even if they have been subjected to publication. The acts of the BoD bind the AE in regard to third persons, even if they are outside the company’s business object, unless it is proved that the third party was aware or ought to have been aware of such excess of the AE’s business object. The mere compliance with the publication formalities concerning the statutes or their amendment does not constitute evidence of the third party’s knowledge (art. 22 pars. 1 and 2 L. 2190/1920). a)

Appointment and termination of office of the members of the BoD

97 The members of the BoD are, in principle, appointed by the common GM of shareholders (art. 34 par. 1 sub. b L. 2190/1920). However, the following cases constitute departures from this principle: – The AE’s statutes may grant to one or more shareholders the right to appoint one or more members of the BoD, not exceeding, however, one third (1/3) of the total number of Directors provided for by the statutes, specifying at the same time the conditions, under which such right is to be exercised, especially in respect of the percentage of participation in the share capital and the blocking of shares (art. 18 par. 3). – The founders may designate in the statutes the names and particulars of the members of the first BoD, which is entitled to exercise its powers until the first ordinary GM is held (art. 34 par. 2 sub. b), in order to appoint a. o. the permanent BoD. – The statutes may authorize the BoD to appoint interim Directors, in order to replace those resigned, deceased or otherwise forfeited their office, whose term of office lasts until the session of the next GM (art. 34 par. 2 sub. c). – In the event of absence97 of members of the BoD or in the case of conflict of interests98 between them and the legal entity of the AE, the Court99 appoints a provisional BoD after the petition of any person, having a lawful interest (art. 69 C. C., applying analogically to all legal entities including commercial companies). 98 A person (natural or legal) ceases to be member of the BoD of an AE: – when his term of office, specified in the statutes or by a resolution of the GM of shareholders, has expired. As mentioned above, the term of office may not exceed six (6) years and is not necessarily the same for all the members of the BoD (art. 19 par. 1). 97

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The AE is devoid of management, when members of its BoD: are deceased or prevented from exercising their duties because of physical or legal incapacity or term expiry, are less than three (3), deny to fulfill their duties or obstruct themselves in the execution of their duties, are appointed by a void resolution of the GM of shareholders (art. 35a) etc. A conflict of interests exists especially a) when a contract is going to be concluded or court proceedings are going to be initiated or terminated between a member of the BoD or its spouse or its relative up to the third degree by blood and the legal entity of the AE (art. 66 C. C.), in which case the Director loses his right to vote in the meeting, approving the conclusion of the contract or the conduct of such trial or b) in the case of self-contract (art. 235 C. C.). Single Member First Instance Court, adjudicating according to the provisions of voluntary jurisdiction (arts. 739 ff. C. P. C.) or, in urgent cases, according to the provisions of interim measures (arts. 682 ff. C. P. C.).

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– through his removal. Member(s) of the BoD, appointed by the common GM of shareholders, may be freely removed by it at any time (art. 19 par. 2). Director(s), appointed by shareholder(s), may be either removed and replaced with others by the appointer shareholder(s) at any time without the concurrence of a serious reason or be removed by a court decision,100 if a serious reason exists in respect of their person, e. g. commitment of corporate fraud and shareholders, representing one tenth (1/10) of the paid up share capital, request the removal (art. 18 par. 4). – in the case of the Director’s legal incapacity, decease or resignation as well as in the case of the AE’s dissolution (art. 49 par. 7 sec. 1 L. 2190/1920). The appointment of the company’s Directors and/or the termination of their office for 99 any reason whatsoever together with their identity particulars as well as the identity particulars of the person, authorized to receive the documents served on the AE, must be entered in the Register of AE (MAE) of the competent Prefecture and the announcement of such registration must be published in the Bulletin of AE and EPE of the Government Gazette (art. 7a par. 1 sub. c and art. 7b pars. 1 and 4 L. 2190/1920). In that case, the publication has merely a declaratory character.101 b)

Composition and function of the BoD

The BoD comes together to a session at least once in every calendar month (art. 20 100 par. 1) and is convened by its President on his own initiative or upon request of at least two (2) of its members, submitted to him. In particular, the convocation is effected by means of an invitation, communicated to the members of the BoD at least two (2) working days prior to the meeting. The invitation must specify with clarity not only the place and date of the meeting but also the issues on the agenda; otherwise, the resolution is only valid, if all the members of the BoD are present or represented at the meeting and nobody objects to the adoption of resolutions on matters, not included in the agenda (art. 20 par. 4). If the President fails to convene the BoD within ten (10) days after the submission of the members’ request102 to him, the requesting members may convene the BoD within a five (5)-day-time limit after the lapse of the aforementioned ten-day-period by notifying the relevant invitation to the other members of the Board (art. 20 par. 5 L. 2190/1920). The BoD meets mostly at the place of the AE’s registered office (art. 20 par. 1), unless 101 the statutes provide for another place of meeting either in Greece or, in compliance 100

101

102

Of the Single Member First Instance Court of the district, where the registered office of the AE is located. A person acquires, therefore, or loses his identity as a member of the BoD, as soon as the event, which brings about his appointment (e. g. resolution of the GM) or removal (death, resignation etc.), occurs. Management acts, effected by the Director even before the completion of the publication requirements concerning his appointment, are valid. About the invocation by the AE as against third parties of irregularities concerning the appointment of Directors, see arts. 7b par. 13 and 7e L. 2190/1920. Such request must state, under the penalty of inadmissibility, the issues on the agenda, the BoD must deal with (art. 20 par. 5 sec. 3 L. 2190/1920).

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with a special approval of the Minister of Development, even abroad. The administrative approval may, further, specify the conditions, under which the BoD may meet abroad, so that any resolution of the BoD adopted during a meeting, which has been convened in violation of such conditions, may be declared null and void with regard to the AE (art. 20 par. 2). However, neither an administrative approval nor a relative provision of the statutes are necessary and the BoD convenes validly outside the AE’s registered office, either in Greece or abroad, when all its members are present or represented at the meeting and none of them objects to it (art. 20 par. 3 L. 2190/1920). 102 The discussions and resolutions of the BoD are registered in the form of a summary into a special Book of minutes, which may be kept on the basis of a computerized system. Following the request of one of its members, the President of the BoD is obliged to register in the Book of minutes an exact summary of the opinion of such member. In the minutes is also registered a list of the members of the BoD, who are present or represented at the meeting (art. 20 par. 6). Copies of the minutes of the BoD’s meetings, for which an obligation of registration in the Register of AE (MAE) exists (art. 7a), must be submitted to the administrative authority (Prefecture) within twenty (20) days after the respective meeting of the BoD for the purpose of approval and publication (art. 20 par. 7 L. 2190/1920). 103 For the BoD to convene and resolve validly, a quorum of half of all its members plus one (1)103 must be present or represented at the meeting, provided that the number of the present Directors is not less than three (3) (art. 21 par. 1 L. 2190/1920). The statutes may, of course, provide for a higher quorum percentage, but in no case for a lower one. The members of the BoD may be represented at the meeting by a proxy. However, with such representative authority may be entrusted only another member of the BoD (and not a third person) and each member may represent validly only one of the other members of the BoD (art. 21 pars. 3 and 4). The resolutions of the BoD are adopted validly by an absolute majority of the members, present and represented at the meeting and in case of equality of votes, the casting vote of the BoD’s President does not prevail (art. 21 par. 2 L. 2190/1920). A higher majority percentage may be required for all or certain subjects either by the AE’s statutes or by the law.104 Resolutions of the BoD, adopted in violation of the law provisions concerning its lawful composition, convocation, quorum and majority requirements as well as in contravention to the provisions of the statutes or the resolutions of the GM of shareholders and in excess of its powers, are absolutely null and void (art. 174 C. C.). c)

Rights and duties of the members of the BoD

104 Each member of the BoD enjoys a. o. the following rights: to be informed by the other members about the progress of the company’s affairs, to participate in the BoD’s meetings after a lawful invitation, to have a free access to the company’s premises and 103

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Fractions, if any, are not counted in determining the number of the members for the quorum (art. 21 par. 1). For example, art. 13 par. 1 sub. a L. 2190/1920: increase of the share capital by issuance of new shares to be resolved by a two third (2/3) majority of the total of the BoD’s members.

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inspect the books and documents of the AE.105 Furthermore, the members of the BoD may have the right of remuneration, consisting in either a) percentages of the AE’s net profits or b) a concrete amount of money, counted in the general expenses of the company’s business, if such remuneration is provided for by the statutes and, if not, pursuant to a special approving resolution of the ordinary GM of shareholders or c) a salary on the basis of a labour contract (art. 24 L. 2190/1920). Finally, members of the BoD may have the right to participate in the AE’s stock option programme106 and acquire shares of the AE (art. 13 par. 9 L. 2190/1920). The members of the BoD have the duty of loyalty towards the AE, consisting in their 105 obligation to protect and promote the company’s interests, omitting at the same time any action to the AE’s detriment. Expressions of this general loyalty duty, the violation of which could consist the penal offence of disloyalty (art. 390 Penal Code), are: – the duty of each member of the BoD to maintain strict secrecy of the company’s confidential matters, which have come to his notice in his capacity as Director (art. 22a par. 3 L. 2190/1920) and – the duty not to compete (art. 23 L. 2190/1920). Members of the BoD, participating in the management of the AE in any manner whatsoever as well as Executive Directors (or Managers, non-members of the BoD) are prohibited from carrying out by profession, without the approval of the GM of shareholders, on their own behalf or on behalf of a third party, any transaction falling within the scope of any of the AE’s objects or from participating as General Partners in (General or Limited) Partnerships, pursuing similar objects. In case of violation of this prohibition by a Director, the AE is entitled to claim damages or, instead of that, it may demand that transactions, carried out on the Director’s own behalf, shall be deemed to have been effected on the AE’s behalf, while concerning transactions, carried out by the Director on behalf of a third party, the remuneration due to him for such services shall be paid or his claim to such remuneration shall be assigned to the AE. The respective claims of the company against its Directors are subject to an one (1)-yearprescription beginning from the notification of the committed acts to the BoD by one of its members or to the AE by a shareholder and in any case to a five (5)-yearprescription beginning from the commitment of the prohibited acts. Loans, credits or guarantees, granted by the legal entity of the AE to or on behalf of: a) 106 members of its BoD, its General Managers or Managers, its founders, family relations of the above persons up to the third degree by blood or marriage and their spouses and b) third persons with the purpose of acquisition by them of AE’s shares, are absolutely prohibited and the contracts concerning such transactions are null and void (art. 23a par. 1).107 The same prohibition applies in respect of loans or credits, granted by a subsidiary company (art. 42e par. 5) a. o. to founders or Managers of the “parent” com105

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Thessaloniki S. M. F. I.C. 4032/1979, Arm. 35, 33; Athens S. M. F. I.C. 2997/1995, EEmpD 1995, 244; Thessaloniki S. M. F. I.C. 32018/1995, DEE 1996, 615. About the possibility of the AE to establish a stock option programme in favour of its personnel, see above under II.4. c) dd). On the contrary, loans or guarantees, granted by the above-mentioned persons to the AE, are allowed.

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pany or by a General Partnership to the above persons of an AE, which participates in it as General Partner (art. 23a par. 3). Any other transaction108 to be concluded between the AE and the above-mentioned persons is only valid, if previously approved by a special resolution of the GM of shareholders. The approval is not granted, if shareholders, representing at least one third (1/3) of the share capital represented at the meeting, oppose to it. However, an approval is not necessary in respect of contracts concluded within the limits of the current transactions of the AE with its customers (art. 23a par. 2). Violation of the aforementioned prohibitions renders the offender liable to imprisonment and/or a pecuniary penalty of not less than EUR 1,000,– (art. 23a par. 4, referring to art. 58a sub. b L. 2190/1920). d)

Other administrative organs

107 The company’s statutes may either provide that the exercise of the BoD’s representative authority may belong to one or more of its members or even to third persons (art. 18 par. 2) or lay down issues, in respect of which the managerial and representative powers of the BoD may be exercised in whole or in part by one or more of its members, managers of the company or third persons, rendering at the same time to the BoD the authority to designate these persons and their powers (art. 22 par. 3). The members of the BoD, to whom such powers have been assigned, are usually called “Executive Directors”, while third persons, entrusted with such duties, are named “Managers” or “General Managers”. The latter are mostly acting in cooperation with and under the instructions of member(s) of the BoD, called “Co-acting Directors” and are deemed to be organs of the company and not its proxies.109 Both the BoD and the underlying administrative organs have the right to appoint a proxy, e. g. a member of the BoD, Director or Manager for the carrying out of one or more certain transactions, in which case the power of attorney must embrace the same form like the contract, for the conclusion of which the power of attorney is rendered (art. 217 sec. 2 C. C.). 108 The rights and duties of the persons, to whom the powers of the BoD are accorded, differentiate according to whether they are members of the BoD or third persons: the Executive Directors have as members of the Board all the rights and duties thereof, but they are liable for every negligence110 (art. 22a par. 2), while the rights and duties of the Managers depend on the terms of the contract connecting them to the AE, which is usually a labour contract. e)

Liability of the BoD

109 Every member of the BoD is liable against the AE for any fault (fraud or negligence), committed by him during the management of the company’s affairs, e. g. for omissions or false entries in the balance sheet, concealing the actual financial position of the AE (art. 22a par. 1). However, a member of the BoD may avoid such liability, if he

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proves111 that he managed the AE’s affairs with the diligence of a conscientious manager or that his acts or omissions were based on a lawful resolution of the GM of shareholders. On the contrary, an Executive Director is obliged to exercise utmost diligence and may, therefore, be discharged from liability only by proving his acting with such diligence (art. 22a par. 2 L. 2190/1920, art. 330 sec. 2 C. C.). Claims of the AE against members of its BoD, who violated their management duties, 110 are raised by the BoD as the AE’s exclusive representative organ (art. 18 par. 1) by means of an action. The action must, however, be filed by the BoD or by special representatives pursuant to a resolution of the GM of shareholders, adopted by an absolute majority, or upon request submitted to the BoD by shareholders, who have acquired the shareholder-identity at least three (3) months before the submission of the request and represent one third (1/3) of the paid up share capital. The fulfillment of these requirements is not necessary, if the damages are due to fraud, committed by the liable Director (art. 22b par. 1). The BoD must bring the action within six (6) months after the date of the GM’s resolution or the submission of the minority’s request (art. 22b par. 2). For the conduct of the court proceedings, the GM may appoint special representatives, who may be otherwise appointed by a court decision,112 if the filing of the action is requested by the minority or if the six (6)-month period of time for the filing of the action by the BoD lapses without effect and the minority of shareholders submits a relevant request to the Court within one (1) month after the lapse of that term (art. 22b par. 3). The claims of the company against its Directors for damages caused to it through their negligence are subject to a three (3)-year prescription from the commitment of the act and if the damages have been incurred by fraud to a ten (10)-year prescription (art. 22a par. 5 L. 2190/1920). The AE may waive its claims for damages against the Director(s) or accept a compromise two (2) years after the claims were born, provided that the GM of shareholders consents to such settlement and a minority equal to one quarter (1/4) of the share capital, represented at the meeting, does not oppose to it (art. 22a par. 4 L. 2190/1920). In that case, the shareholders may claim compensation for the “indirect” damages, caused to them through the bad management of the AE’s affairs, by filing an action against the liable Director(s) according to the law provisions on torts (arts. 914, 919, 281 C. C.). Finally, the penal liability of the members of the BoD is regulated by the L. 2190/1920 111 (arts. 54 ff.) as well as by other special laws (art. 685 Commercial Law, art. 4 par. 4 C. L. 148/1967, art. 390 Penal Code, art. 20 L. 2523/1997, art. 115 par. 2 L. 2238/1994 etc.) concerning acts or omissions, made by them e. g. during the fulfillment of the AE’s obligations (payment of debts of tax or other nature) to the State.

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In this case, the burden of proof is reversed to that of the normal liability system: i. e. the member of the BoD is the one, who is obliged to prove that he has acted with the diligence, required by the law. This is a decision of the President of the First Instance Court of the district, where the AE’s registered office is located, adjudicating according to the procedure of voluntary jurisdiction (arts. 739 ff., 786 C. P. C.).

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8.

Auditors

II. Company Limited by shares – Anonimi Etairia (AE)

112 The auditors are the third body of the AE, entrusted with the task of supervising the company’s management by exercising basically an accounting control. The institution of a “supervisory board” does not exist under Greek law. Apart from the obligation imposed by the law (art. 36 L. 2190/1920) on the AE to have its annual accounts audited, a control of the financial management of the AE may be ordered by the Court113 pursuant to a petition of one of the persons, exhaustively designated by the law (minority of shareholders, Stock Exchange Committee, Minister of Development etc., art. 40 L. 2190/1920), to be exercised according to the provisions of arts. 39a, 40, 40a, 40b, 40c, 40d and 40e L. 2190/1920. Finally, the supervision of the AE’s formation and operation is exercised by the Minister of Development through his representatives according to the provisions of arts. 51-53a L. 2190/1920. a)

Appointment of the auditors

113 The appointment of the auditors belongs to the exclusive authority of the ordinary GM of shareholders, which appoints each time for the following fiscal year at least two (2) auditors and an equal number of substitutes. The auditors of the first financial year are either nominated by the statutes or appointed by an extraordinary GM of shareholders to be convened within three (3) months after the AE’s formation (art. 36 pars. 1 and 2, art. 34 par. 1 sub. b). The appointment and/or removal of the auditors for any reason whatsoever together with their identity particulars are subject to the publication requirements of art. 7b (art. 7a par. 1 sub. c L. 2190/1920). 114 The auditors must be university graduates, licensed to practice the profession of economist by the Economic Chamber of Greece114 (art. 36a par. 1), unless the law requires that the statutory audit of the AE must be carried out by a Chartered Accountant, in which case the latter must have specific qualifications. The reappointment of the same auditors for more than five (5) financial years is prohibited (art. 36a par. 2). Founders of the AE, shareholders, representing a percentage higher than one twentieth (1/20) of the paid-up share capital, members of the BoD, relatives of the above up to the second degree by blood or marriage, their spouses etc. (art. 10 par. 1) as well as any employee of the AE or of its dependent company, civil servants, employees of public law legal entities, bank employees and employees of public utility enterprises may not be appointed as auditors of the AE (art. 37 par. 4 L. 2190/1920). 115 Large AE, which exceed on the closing date of their balance sheet the numerical limits of two of the three criteria, provided for in art. 42a par. 6 L. 2190/1920,115 as well as 113

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The Single Member First Instance Court of the district of the AE’s registered office, adjudicating according to the procedure of voluntary jurisdiction (arts. 739 ff., 788 C. P. C.) is the competent Court to order such control a. o. when according to its discretion it is probable that the provisions of the law or of the company’s statutes or of the GM’s resolutions have been violated by the alleged acts (art. 40 pars. 1 and 2 L. 2190/1920). According to the provisions of art. 2 P. D. 475/1991 (Gov. Gaz. A’ 176). See below under II.9. a).

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other companies,116 provided for by the P. D. 226/1992, must elect their auditors from amongst the Chartered Accountants of the Body of Chartered Accountants,117 in which case the companies have the option of appointing only one (1) Chartered Accountant (art. 36 par. 1). More specifically, the GM chooses the auditor(s) out of an official list of at least six (6) Chartered Accountants, furnished to the AE by the Supervisory Council of the Body of Chartered Accountants at least five (5) days prior to the GM’s session (art. 36 par. 2 sec. 2). Within five (5) days after the session of the GM, the appointed auditors must be notified of their appointment and if they do not refuse such appointment within a five (5)-day-time limit after their notification, they are considered as having accepted it and carry all the liabilities and obligations connected to their status as auditors of an AE (art. 36 par. 4 L. 2190/1920). b)

Rights and duties of the auditors

For the ordinary GM of shareholders to decide validly on the annual accounts, they 116 must have been previously audited by at least two (2) auditors or one (1) Chartered Accountant respectively (art. 36 par. 1). The auditors are entitled to request the convocation of an extraordinary GM of shareholders from the President of the BoD, who is obliged to convene the GM within ten (10) days from the date of submission of such request to him. The content of the auditors’ request constitutes the issue on the agenda of such meeting (art. 38 L. 2190/1920). Moreover, the auditors have a right of remuneration: auditors’ fees are always paid by the AE and their amount is determined by the resolution of the GM, appointing the auditors (art. 36 par. 3). The duties of the auditors are (art. 37 pars. 1 and 2 L. 2190/1920): – to supervise during the fiscal year the accounting and administrative situation of the AE by having the right of access to any book, account or document, including the minutes of the GM and the BoD; during the supervision, they are obliged to give all the necessary instructions to the BoD and if they notice a violation of the provisions of the law or the statutes, they must refer this to the competent supervising administrative authority (Prefect, representing the Minister of Development). – to audit the balance sheet and the “profit and loss” account after the lapse of the fiscal year and submit to the ordinary GM a report118 about the results of their audit. In their report the auditors must, in addition, verify the agreement of the content of

116

117

118

Such companies are (art. 3 par. 1 P. D. 226/1992): bank and insurance companies, investment, mutual fund management and leasing companies, the affiliated companies concerning their consolidated accounts (art. 100 par. 1 L. 2190/1920), AE listed on the Stock Exchange or AE, the share capital of which has been subscribed in whole or in part by the public, companies, organizations or generally undertakings, the annual accounts of which are subject, according to law provisions, to a mandatory audit by Chartered Accountants, such as companies, which obligatorily or optionally prepare their annual accounts in compliance with the International Accounting Standards, adopted by the European Union (art. 137 par. 1 L. 2190/1920) etc. Such companies enjoy the benefits, set forth in art. 37a L. 2190/1920 and art. 14 P. D. 226/1992. Provided for in the L. D. 3329/1955 “on the formation of a Body of Chartered Accountants”, Gov. Gaz. A’ 230/1955. The audit report is called “audit certificate”, when it is drawn up by Chartered Accountants.

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II. Company Limited by shares – Anonimi Etairia (AE)

the BoD’s management report with the relevant annual accounts (art. 43a pars. 3 and 4). – to attend the ordinary GM of shareholders, convened to approve the annual accounts and render any explanation connected to the audit, carried out by them. c)

Liability of the auditors

117 In performing their duties, the auditors are held responsible for any fault, being liable to compensation of the AE. The liability of the auditors may not be excluded, amended or limited by contract and the AE’s claims for damages against them are prescribed after the lapse of two (2) years (art. 37 par. 3 L. 2190/1920).

9.

Accounting

a)

Annual financial statements (annual accounts)

118 As commercial companies, thus having the merchant capacity, the Company Limited by shares (art. 1 L. 2190/1920) and by extension, the Company with Limited Liability (EPE) (art. 3 par. 1 L. 3190/1955) and the Partnership Limited by shares (art. 19 Commercial Law) are obliged to keep the books, provided for by the Commercial Law (art. 8) and draw up at the commencement of their operation and at the end of every fiscal year an inventory, i. e. a detailed description of the company’s assets and liabilities, which presents the real situation of the company’s property at a concrete moment (art. 41 pars. 1 and 2 L. 2190/1920, referring to art. 9 Commercial Law). On the basis of such inventory, the Board of Directors, as the AE’s administrative organ, must proceed to the drawing up of the annual financial statements (annual accounts) at the end of each financial year119 and, more specifically, in due time, so that the ordinary General Meeting of shareholders can be convened within the first six (6) months after the end of the financial year, in order to approve them (art. 25 L. 2190/1920). 119 The annual financial statements, like all the other books of the Greek and foreign AE, provided for by the Commercial Law, must be kept in the Greek language (art. 41 par. 3) and in euro (art. 43b par. 2) and be signed by three (3) different persons, namely: a) by the President of the BoD or his substitute, b) by the Executive Director and in case no such Director exists or his identity coincides with that of one of the above persons, by a member of the BoD, appointed by it and c) by the AE’s Chief Accountant (art. 42a par. 5 L. 2190/1920). 120 The AE’s annual financial statements (annual accounts) comprise (art. 42a par. 1): – the balance sheet, i. e. a financial statement, depicting briefly and by comparison the company’s assets and liabilities,

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The financial year (fiscal year or annual accounting period) may not exceed twelve (12) months with the only exception of the first financial year, which may be fixed on a period of time not exceeding twenty four (24) months (art. 42 L. 2190/1920).

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– the “profit and loss account”, presenting by addition and subtraction the proceeds and expenses of the company, effected during the closed accounting period as well as the company’s profits or /and losses and their origin, – the “table of distribution of results”, listing the company’s profits and presenting the way the profits will be distributed (art. 42d par. 2) and – the notes on the accounts, also called “appendix”, which provide the annual financial statements with the necessary elucidation (art. 43a par. 1 L. 2190/1920). These four documents constitute a uniform unity (art. 42a par. 1) to be drawn up 121 according to the accounting principles and methods, specified in the law120 and must depict with absolute clarity a true picture of the AE’s actual property structure, financial-pecuniary situation and the results of the concrete accounting period (arts. 42a par. 2 and 43a par. 1 sub. q), in order to provide the shareholders and third parties with a thorough information about the AE’s financial position. Special provisions apply a. o. for the structure and the content of the annual accounts of credit and other financial institutions (arts. 110-131 L. 2190/1920). Companies Limited by shares, which do not exceed on the closing date of their balance 122 sheet the numerical limits of two of the following three criteria (art. 42a par. 6): – balance sheet total of EUR 1,500,000,–, – a net turnover of EUR 3,000,000,– or – an average number of 50 employees during the respective accounting period are allowed to prepare a summarized appendix (notes on the accounts) (art. 43a par. 2) and publish a summarized balance sheet (art. 43b par. 1 L. 2190/1920).121 Affiliated companies, as defined in art. 42e par. 5 L. 2190/1920, are obligated to draw up 123 consolidated annual accounts according to the arts. 90-109 and 134 ff. L. 2190/1920. By this way, the real property situation, the financial-pecuniary position and the results of the closed fiscal year of all the affiliated companies are presented as a uniform financial unity. The consolidated accounts are mandatorily audited by one or more Chartered Accountants (art. 108, art. 137 par. 1 L. 2190/1920). Companies Limited by shares, the securities of which are admitted to trading on a 123a regulated Stock Exchange Market, are obliged to prepare their annual financial state-

120

121

Arts. 42a, 42b, 42c, 42d, 42e, 43 and 43a L. 2190/1920. These law provisions do not apply in the case of companies, which obligatorily or optionally prepare their annual accounts according to the International Accounting Standards, adopted by the European Union (Regulation (EC) 1725/2003, art. 139 par. 1 L. 2190/1920). This discretion concerns only the “publication” of the balance sheet; thus such companies have also the obligation of drawing up detailed annual accounts, except for the appendix (art. 43a par. 2). Furthermore, these AE may, by presidential decrees, be fully or partially exempted from the publication obligations, provided for in the arts. 7a, 26 par. 2 (publication of the invitation of the GM of shareholders), 43b par. 5 (publication of the annual accounts, except for the appendix, in the Government Gazette and in the newspapers) and 36 (auditing) of the L. 2190/1920 (art. 7a par. 6 L. 2190/1920).

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124

Greece

II. Company Limited by shares – Anonimi Etairia (AE)

ments in conformity with the International Accounting Standards (IAS), adopted by the European Union (Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002, art. 134 par. 1 L. 2190/1920, as introduced by art. 13 L. 3229/2004). In that case, the annual accounts as well as the management and audit reports must be subjected to additional publication requirements (publication in the Internet, submission to the Capital Market Commission) (art. 135 par. 1 subs. b and c L. 2190/1920). AE, not publicly traded on a regulated market as well as Companies with Limited Liability have the discretion of preparing their annual accounts according to the International Accounting Standards pursuant to a resolution of the common GM of shareholders (art. 29 par. 1, art. 31 par. 1 L. 2190/1920) or of the Meeting of company members (art. 13 L. 3190/1955) respectively (art. 134 par. 2 L. 2190/1920). 124 In addition to the annual financial statements, the BoD is obliged to submit to the ordinary GM of shareholders a management report,122 which provides a clear and true picture of the AE’s business progress and financial position as well as information about the anticipated development of the company and its activities in the field of research and development (art. 43a par. 3 subs. a and b). At least thirty (30) days prior to the session of the ordinary GM, the BoD’s report must be brought to the notice of the AE’s auditor(s) for the purpose of verification (art. 43a par. 3 sub. c and par. 4 L. 2190/1920). aa)

Approval of the annual accounts and publication requirements

125 At least twenty (20) days prior to the GM’s session, copies of the annual accounts together with the relevant reports of the BoD and the auditors must be submitted by the AE to the Prefecture (art. 43b par. 3, art. 7a par. 1 sub. g). At the same period of time the BoD is obliged to cause the publication of the annual accounts, except for the appendix, together with the relevant audit certificate123 (art. 43b pars. 4 and 5, art. 7b par. 1 sub. b sec. 2): – in the Bulletin of AE and EPE of the Government Gazette (art. 7b par. 1 sub. b), – in one daily political newspaper at the discretion of the BoD, which is issued in Athens and has a wider circulation throughout the country and in one daily financial newspaper, which meets the requirements of art. 26 par. 2 and – in one daily or at least weekly newspaper of those issued in the area of the AE’s registered office. 126 Ten (10) days prior to the GM’s session, the same documents are notified to any shareholder, who has requested it (art. 27 par. 1). AE, which have the discretion of publishing a summarized balance sheet (art. 42a par. 6), must state in the publication that the published balance sheet is a summary and name the Register of AE, wherein the company’s full annual accounts have been or are going to be registered (art. 43b par. 1 L. 2190/1920).

122

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In the case of application of the International Accounting Standards to the preparation of the annual accounts, the content of the BoD’s management report is provided for by the Standards (art. 136 par. 1 L. 2190/1920). If the law requires the exercise of the audit by Chartered Accountants.

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The approval of the annual accounts belongs to the exclusive authority of the ordinary 127 GM of shareholders (art. 34 par. 1 sub. c), which may, if necessary, amend them. Within twenty (20) days after the GM’s session, a copy of the approved or amended annual accounts together with a certified copy of the GM’s minutes (art. 26a par. 2) must be submitted to the Prefecture (art. 43b par. 6). In the case of their amendment, the administrative authority (Prefect) enters the certified copy of the amended annual accounts in the MAE and causes within twenty (20) days after the GM’s session and at the expenses of the AE the publication of a) an announcement concerning the registration in the MAE and b) the full text of the amended annual accounts, except for the appendix, in the Government Gazette (Bulletin of AE and EPE) (art. 7b par. 1 sub. b sec. 2 L. 2190/1920). b)

Distribution of profits

The distribution of the AE’s net profits to the shareholders in proportion to their 128 participation in the share capital presupposes the end of the fiscal year, during which the profits were effected and a resolution of the ordinary GM of shareholders upon the approval of the annual accounts and the distribution of profits, adopted within six (6) months after the end of the fiscal year (art. 25). “Net profits” are those, deriving from the actual gross profits of the company after the deduction of any expenditure, loss, legal depreciation and any other corporate commitment (art. 45 par. 1). According to the law (art. 45 par. 2 L. 2190/1920), the AE’s net profits are distributed to the shareholders with the following order: – An amount of at least one twentieth (1/20) of the net profits, specified by the law (art. 44) or by the articles of association, is retained for the formation of the regular legal reserve (art. 45 par. 2 sub. a). – After the deduction of the amount, required for the setting up of the regular reserve, an amount of the net profits is retained, in order to be distributed to the shareholders as first (initial) dividend. Such dividend corresponds to either at least 35% of the profits or an amount of the profits equal to at least 6% of the paid up share capital, depending on which amount is higher (art. 45 par. 2 sub. b L. 2190/1920, art. 3 par. 1 C. L. 148/1967). – Any profits remaining after the deduction of the amounts, required for the formation of the regular reserve and the initial dividend, are allocated in accordance with the provisions of the statutes (art. 45 par. 2 sub. c), which may order the setting up of an extraordinary or free reserve or the distribution of profits to the holders of founders’ titles or to the shareholders as “additional dividend”. The GM of shareholders is obliged to implement such provision of the company’s statutes. However, it may decide by a resolution, passed with the qualified quorum and majority (arts. 29 par. 3 and 31 par. 2), that the profits to be distributed to the shareholders according to the statutes as additional dividend after the distribution of the first dividend are to be allocated for the increase of the AE’s share capital through the issuance of new shares, granted to the shareholders without return (art. 45 par. 3 L. 2190/1920).

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129

Greece

II. Company Limited by shares – Anonimi Etairia (AE)

129 The AE may, in addition, distribute to its shareholders interim dividends or percentages out of its retained earnings, in which case the requirements for such distribution are the following (art. 46 L. 2190/1920): – preparation by the BoD of an accounting report on the company’s assets, – submission of the report to the Prefecture for registration in the MAE, – publication of the report at least twenty (20) days prior to distribution in one of the Athens daily newspapers and in the Bulletin of AE and EPE of the Government Gazette, – dividends or other items, subject to distribution, may not exceed one half (1/2) of the AE’s net profits, as presented in the accounting report. aa)

Restrictions concerning the distribution of profits

130 Under the reservation of the provisions concerning the capital reduction, no distribution whatsoever may be effected to the shareholders, if on the closing date of the AE’s fiscal year the total of the company’s equity is or, after such distribution, will be less than the amount of the paid up share capital, increased by the reserves, the distribution of which is prohibited by the law or the statutes (art. 44a par. 1). The amount distributed to the shareholders may not exceed the amount of profits of the closed fiscal year, increased by the profits of previous fiscal years and the reserves, the distribution of which is permitted and was resolved by the GM, and reduced by the amount of the losses of previous fiscal years and the amounts, required to be allocated for the setting up of reserves in accordance with the law and the statutes (art. 44a par. 2 sec. 1 L. 2190/ 1920). bb) Way of distribution of profits

131 The amount of profits to be distributed to the shareholders in proportion to their participation in the share capital is paid to them or to their proxies124 in cash in return of dividend coupons125 within two (2) months after the date of the GM’s resolution upon approval of the annual accounts and distribution of profits. If the two (2)-month period expires without effect, the shareholders’ right to a dividend becomes interestbearing (art. 44a pars. 2 and 3). Shareholders, who have received from the AE an amount of the net profits in violation of the provisions of the law (arts. 44a, 45 and 46), e. g. without a previous resolution of the ordinary GM of shareholders, are obliged to return these amounts to the company, under the condition that the AE proves that the shareholders knew or, in view of the circumstances, ought to have known that the effected distributions were unlawful (art. 46a L. 2190/1920). c)

Setting up of reserves

132 The reserves of an AE are distinguished into “open” and “covered” reserves. The first constitute an abstract mathematical quantity, entered into the balance sheet under the 124

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350

In that case the power of attorney must be a special one and may be even a simple letter (art. 79 par. 1 L. 2238/1994). Holders of bearer shares not listed on the Stock Exchange must submit to the AE, apart from their dividend coupon, a solemn statement according to the L. 1599/1986, declaring that they are the owners or beneficiaries (art. 1176 C. C.) of the share(s) (art. 79 par. 2 L. 2238/1994).

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list of the company’s “liabilities” and symbolizing the AE’s property, which must stay at its disposal beyond the one, bound to the company by means of the share capital. The covered reserves are created either through the deliberate depreciation of parts of the company’s assets or through the inflation of its liabilities and, generally, when the situation of the AE’s property is presented in the balance sheet worse than it really is. The open reserves are, further, distinguished into “legal” and “free” reserves and the 133 legal reserves into “regular”, “extraordinary” and “free”. In particular: – Regular (ordinary) legal reserve. This kind of reserve is exclusively used, in order to equalize, prior to any distribution of a dividend to the shareholders, any eventual debit balance, arising from the “profit and loss account”. It is set up through the annual deduction of at least one twentieth (1/20) of the AE’s net profits. The statutes may provide for a higher percentage than the minimum, laid down by the law. Such retention ceases to be mandatory, as soon as the regular legal reserve reaches an amount equal to at least one third (1/3) of the share capital (art. 44 L. 2190/1920). – Extraordinary legal reserves. They are formed, when the AE’s property increases, but the law does not permit such increase to be depicted in the balance sheet as a profit. Extraordinary reserves are e. g. the amounts, deriving from the issuance of shares above their nominal value (art. 14 par. 3), the value of in kind contributions, when the AE has granted in return founders’ titles (art. 15 par. 5) etc. The purpose of these reserves is the same like the one of the regular reserve, namely to balance the company’s losses. – Free legal reserves. The setting up of such reserves is either provided for by the statutes or resolved by the GM of shareholders, if the latter is so authorized by the statutes. In particular, the AE’s statutes may e. g. increase the regular legal reserve or prescribe the setting up of other reserves, designating at the same time their destination. The GM of shareholders may form free reserves by a resolution, specifying mostly their destination, but in no case to an extent not justified by the accepted commercial practice or in contravention to the provisions of the law or the statutes (art. 35b par. 2 L. 2190/1920).

10. Termination of business a)

Dissolution of the AE

A Company Limited by shares is dissolved only due to one of the reasons, set forth in 134 the law exhaustively.126 The concentration of all shares in the hands of a single shareholder (Single Member AE) constitutes no reason for dissolution (art. 47a par. 2). The facts bringing about the AE’s dissolution are, therefore, the following:

126

This means that even the company’s statutes may not provide for extra reasons for the AE’s dissolution.

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aa)

Expiration of the AE’s duration

II. Company Limited by shares – Anonimi Etairia (AE)

135 An AE is ipso jure dissolved, as soon as the time of its duration, laid down in the initial or amended articles of association (art. 2 par. 1 sub. c) in the form of a termination date or a duration period, has lapsed (art. 47a par. 1 sub. a L. 2190/1920). The dissolution of the company in this case may be prevented by a resolution of the exceptional GM of shareholders (arts. 29 par. 3 and 31 par. 2) on the extension of the AE’s duration,127 under the condition that this resolution is entered in the Register of AE (MAE) prior to the expiration of the AE’s duration. If the resolution is adopted by the GM prior to this time, but it is registered in the MAE after the lapse of that time, the AE will be ipso jure dissolved, but the GM’s resolution on the extension will have the effect of a resolution on the company’s revival.128 The dissolution of the AE due to this reason is, further, not subject to any publication requirement, since the company’s duration is designated in the already lawfully published statutes. bb) Resolution of the exceptional GM of shareholders

136 The AE may be dissolved at any time by a resolution of the exceptional GM of shareholders, passed with the qualified quorum and majority (arts. 29 par. 3 and 31 par. 2) (art. 47a par. 1 sub. b) and subjected to approval by the administrative authority and subsequent publication (arts. 7a par. 1 sub. i and 7b). If the total amount of the AE’s equity becomes less than one half (1/2) of its share capital, the Board of Directors (BoD) is obliged to convene the GM of shareholders within six (6) months after the end of the fiscal year, which will resolve either the company’s dissolution or the adoption of another measure (art. 47 L. 2190/1920). cc)

Declaration of the AE’s bankruptcy

137 The AE is obligatorily dissolved, as soon as it is declared bankrupt by a decision of the Multi Member First Instance Court of the district of its registered office, pursuant to a petition of the AE itself or of any of its creditors (art. 528 Commercial Law, art. 6 par. 18 sub. n L. 2479/1997, art. 2 pars. 1 and 4 L. 635/1937, art. 47a par. 1 sub. c L. 2190/1920). The registration of the court decision in the Register of AE has a declaratory character, while the publication of the respective announcement, concerning such registration, in the Bulletin of AE and EPE of the Government Gazette serves the invokability of the company’s dissolution against third parties (art. 7a par. 1 sub. j and art. 7b par. 13 L. 2190/1920). The declaration of the AE’s bankruptcy by the Court is followed by the bankruptcy procedure, during which the company retains its organs.129 If a part of the AE’s assets remains after the completion of the bankruptcy proceedings, the AE enters the stage of liquidation.

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Such resolution is subject to approval by the administrative authority and publication (arts. 7a par. 1 sub. b and 7b), because it constitutes an amendment of the company’s statutes. See below under II.10. c). However, the competent Court (arts. 549 and 550 Commercial Law) appoints a special bankruptcy administrator (trustee in bankruptcy), who is entrusted with the management and representation of the bankrupt AE.

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dd) Revocation by the administrative authority of the authorization of the AE’s formation

The revocation by the administrative authority (Prefect, representing the Minister of 138 Development) of its decision, establishing the AE, is mandatory in the following cases (arts. 48 and 48a L. 2190/1920): – No payment, at the time of the company’s formation and/or at any capital increase, of the AE’s share capital, either in whole or in part, as specified in the statutes. – Failure of the AE to remove from its management a member of the BoD, Manager or any other person, entrusted with the AE’s administration, who has been sentenced to imprisonment for a crime, committed by him and related to the management of the company’s interests. – Reduction of the AE’s equity to an amount less than one tenth (1/10) of its share capital. However, the administrative authority is not obliged, but it may, by discretion, revoke 139 the already granted authorization, when the AE has not submitted to it, according to the law and the articles of association, balance sheets of at least three (3) fiscal years, which have been approved by the GM of shareholders. The revocation of the authorization requires an administrative decision to this effect, which is notified to the company’s BoD and brings about the company’s dissolution, once registered in the MAE. The publication in the Bulletin of AE and EPE of the Government Gazette serves merely the dissolution’s invokability as against third parties (arts. 7a par. 1 sub. d and 7b par. 13 L. 2190/1920). b)

Liquidation of the AE

With the only exception of the case of the AE’s bankruptcy and automatically after its 140 dissolution, the company enters the stage of liquidation (art. 47a par. 3). As long as the liquidation procedure lasts, the AE continues to exist as a corporation with legal personality and merchant capacity, but serving a different object, i. e. the object of liquidation (art. 72 C. C.). This new object of the company determines also the competence of its organs: thus, the GM of shareholders retains all its authorities (art. 49 par. 3), while the BoD ceases to exist and is replaced, in effect, by the liquidator(s) (art. 49 par. 7 sec. 1). Every document of the company in printed form must, further, state expressly that the AE in question is “in liquidation” (art. 7c sub. c). The liquidation procedure is governed by the provisions of art. 49 L. 2190/1920 and arts. 49 par. 1 and 50 L. 3190/1955 on the Companies with Limited Liability, applying analogically, which are of mandatory nature and may, therefore, in no case be deviated by opposite provisions of the statutes. The liquidation stage may not exceed five (5) years from the date of its commencement and if it exceeds this period, the AE will be struck off the MAE. However, it may continue beyond the five (5)-year-period only after a special permission of the administrative authority. In any case, the liquidation may under no circumstances exceed a ten (10)-year-period of time (art. 49 par. 6 L. 2190/1920). aa)

Appointment and removal of liquidators

The liquidators constitute an organ of the AE, entrusted with authorities, which are 141 very similar to those of the BoD. This is the reason, why the provisions concerning the Vasiliki Vavitsa-Hohenau

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BoD apply analogically to the liquidators (art. 49 par. 7 sec. 2). The liquidators are deemed to be the managers of the legal entity of the dissolved company (art. 74 C. C.) and they are usually designated by the articles of association or otherwise appointed by the GM of shareholders, which is free to appoint even only one (1) liquidator, as far as the articles of association do not provide otherwise (art. 49 par. 7 sec. 4 L. 2190/1920). In particular, – in the case of the AE’s dissolution by a resolution of the exceptional GM, the liquidators are appointed with the same GM’s resolution (art. 47a par. 3 sec. 3), – in the case of dissolution of the AE due to expiration of its duration and if the statutes do not provide otherwise, the BoD acts temporarily as liquidator until liquidators are appointed by the GM (art. 47a par. 3 sec. 2) and – in the case of dissolution after revocation of the administrative authorization, the liquidators are appointed by the administrative authority, if the GM of shareholders fails to appoint them within one (1) month after the publication of the revoking administrative decision (arts. 48 par. 2 and 48a par. 2 L. 2190/1920). 142 The law provides, further, for the possibility of appointment of the liquidators by the Court, especially in the case of conflict of interests (arts. 73 par. 2 and 69 C. C.). The GM of shareholders may freely remove the liquidators, while the Court may remove only liquidators, appointed by it or by the administrative authority. The appointment and replacement of the liquidators (resolution of the GM, court decision), together with their identity particulars, must be published pursuant to art. 7b (registration in the MAE, publication in the Bulletin of AE and EPE of the Government Gazette) (art. 7a par. 1 sub. k L. 2190/1920). bb) Duties of the liquidators

143 The liquidators represent the dissolved AE and sign for it by placing their signatures below its trade name. Unless the articles of association provide otherwise, the liquidation is carried out by all liquidators, acting collectively (art. 49 par. 1 L. 3190/1955) and if they are two (2), a unanimous decision of them is required. The AE’s liquidators have the following duties: – to draw up an inventory of the AE’s assets and cause the publication in the press and in the Bulletin of AE and EPE of the Government Gazette of the balance sheet by submitting a copy of it to the Prefecture, when they take over their duties and upon termination of the liquidation (art. 49 pars. 1 and 2 L. 2190/1920) – to settle without delay the pending affairs of the company, convert its property into cash, pay off its debts and collect the claims owed to it – to enter into new business, serving the purpose of liquidation and the interests of the AE, such as the sale of the company’s immovable property, its business in whole or sectors thereof or individual fixed assets of it but only after the lapse of four (4) months after its dissolution (art. 49 par. 4 L. 2190/1920, art. 49 par. 2 L. 3190/1955). Within the time limit of four (4) months after the AE’s dissolution, every shareholder or creditor may request from the Court130 the determination of the lowest selling prices of the company’s fixed property, of sectors, sections or the entirety of 130

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Single Member First Instance Court of the district, where the AE’s registered office is located, adjudicating according to the procedure of arts. 739 ff. Civil Procedure Code.

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the company’s business, such court decision being binding on the liquidators and not subject to any regular or extraordinary legal remedy (art. 49 par. 4 sec. 3 L. 2190/ 1920) – to draw up the annual accounts and submit them to the GM of shareholders for approval together with the results of liquidation and a report, explaining the grounds, which have prevented the termination of liquidation (art. 49 par. 5 secs. 1 and 2) – after the completion of the liquidation: to draw up the final annual accounts, submit them to the GM for being approved and, after such approval, cause their publication in the Bulletin of AE and EPE of the Government Gazette and distribute to the shareholders the remaining liquidation proceeds of the AE’s property, pro rata of their participation in the paid up share capital (art. 49 par. 5 sec. 3 L. 2190/1920 and art. 50 L. 3190/1955) – to cause the striking of the AE off the Register of AE (MAE). Once struck off the Register, the winding up of the AE is completed and the company ceases to exist.131 The balance sheet of the liquidation and the final balance sheet (art. 7a par. 1 sub. l) as 144 well as the striking of the company off the MAE (art. 7a par. 1 sub. m) are subject to the publication requirements of art. 7b. c)

Revival of the AE

An AE may revive, i. e. abandon the stage of liquidation and return to its productive 145 stage, only as long as the liquidation has not been terminated yet and, in particular, the distribution of the liquidation proceeds to the shareholders has not started yet. The AE’s revival requires (art. 47a par. 4 L. 2190/1920): – dissolution of the AE due to expiration of its duration or by a resolution of the exceptional GM or due to its bankruptcy, when the bankruptcy procedure has been terminated by compromise or reinstatement, according to the relevant provisions of the law, – resolution of the exceptional GM of shareholders, adopted by the qualified quorum and majority (arts. 29 par. 3 and 31 par. 2 L. 2190/1920), – approval of such resolution by the administrative authority (Prefecture) and – publication, i. e. registration of the administrative approval in the MAE, publication of the announcement in the Bulletin of AE and EPE of the Government Gazette. The revived AE is deemed to be the same legal entity as before, i. e. no new company is 146 established, but the old one starts to operate again. 131

If, however, after the completion of the liquidation stage, the existence of an item of the AE’s assets or a creditor, who has not been satisfied yet, becomes known, the liquidation stage revives and liquidators are appointed anew on the initiative of anyone, having a lawful interest. In that case, the (new) liquidators must notify the revival of the AE’s liquidation to the competent Prefecture. In order to satisfy such creditor, the AE has a claim against its shareholders for the liquidation proceeds, distributed to them, according to the law provisions on unjustified enrichment (arts. 904 ff. C. C.).

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III. Company with Limited Liability – Etairia Periorismenis Euthinis (EPE) 1.

Character of the EPE

147 The Company with Limited Liability (“Private Limited Company”) is called in the Greek terminology “Etairia Periorismenis Euthinis” (EPE)132 and is governed by the L. 3190/1955 (Gov. Gaz. A’ 91/16. 04. 1955), which has been amended several times, in order to be adapted to various EC Directives. The provisions of the L. 2190/1920, governing the Companies Limited by shares (AE), apply analogically for filling the gaps that the law of the EPE has, especially concerning the company’s capital structure. 148 The EPE is a commercial company ex lege by reason of its form, equipped with legal personality and, in contrast to the AE, with a less complicated structure and organisation, a relatively small fixed capital of at least EUR 18,000,– (art. 4 par. 1)133 and a small number of company members. In particular, the EPE has the merchant capacity, even if its object is the carrying out of a non-commercial undertaking (art. 3 par. 1). It obtains the legal personality, as soon as the publication formalities are fulfilled134 (art. 9 par. 1), without being subjected to any state control. Its capital is divided into equal shares (company parts) and the participation of each company member in the EPE corresponds to the possession of one or more shares, which are not incorporated into a share certificate (art. 1 par. 2). 149 Although classified as capital company, the EPE comprises elements of both capital and personal companies. Beyond the existence of a fixed share capital, the EPE differs from the personal companies to the extent that the legal entity of the company is solely liable for the satisfaction of its creditors (the company members carry no personal liability for the EPE’s obligations and debts, art. 1 par. 1). On the other side, the laxity of its internal structure permits the inclusion of personal elements135 in the formation of the partners’ relationship to the EPE and to each other and distinguishes so the EPE from the AE. With the only exception of large EPE136 (art. 23 par. 2), this corporate form has a twotier structure consisting of the Meeting of company members and the managers.

132

133 134 135

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For simplification reasons, the abbreviation “EPE” will be used in any context, where the Greek Company with Limited Liability is meant. If not indicated differently, the articles in this chapter refer to the L. 3190/1955. See below under III.2. a) ee). Such “personal” elements are a. o. the exercise of the management and representation of the EPE by all the company members, acting collectively, unless the statutes or the members’ Meeting provide otherwise (art. 16), designation by the EPE’s statutes of events, which are closely connected to the person of the company members, like death, legal incapacity, bankruptcy, as reasons leading to the dissolution of the company (art. 44 par. 2), transfer of the company parts depending on the consent of the company members (art. 6 par. 3), adoption of the resolutions of the members’ Meeting by a majority of both capital and persons (arts. 13 and 38 par. 1) etc. See below under III.7. b).

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The company form of the EPE is constructed mainly for the conduct of small and 150 middle-sized enterprises. Compared to the number of Companies Limited by shares (AE) (approximately 50,000), there are only few EPE (approximately 5,500) existing nowadays in Greece; even if about 400 EPE are established per year in Greece, a considerable number thereof is converted into the more common corporate form of AE within short time after their establishment.

2.

Formation of the EPE

a)

Formation procedure

The formation requirements of an EPE are the following: – the pre-approval of the company’s trade name and distinctive title, rendered by the competent Chamber, – the adoption of the articles of association, – the payment of the share capital, of the capital concentration tax (and other fees) and – the publication of the articles of association. aa)

151

Pre-approval of the company’s trade name and distinctive title137

The Chamber138 of the district, where the registered office of the EPE in formation is 152 (going to be) located, is the competent authority to decide on the pre-approval of the company’s right to use its specific trade name and distinctive title, and to issue the respective pre-approval certificate. The pre-approval is rendered on the basis of the object, which the company in formation declares to pursue. It is not explicitly mentioned by the law, whether the pre-approval consists a requirement for the signature of the EPE’s formation deed and must therefore precede it or not, but this is affirmed by the Greek doctrine, because the law itself provides that the notary public is obliged not to proceed to the notarization of the formation deed, but to request the repetition of the pre-approval procedure by the competent Chamber, when he notices a vast discrepancy between the company’s object revealed in the formation deed and that, on the basis of which the pre-approval has been rendered (art. 5a par. 1 sub. c L. 1089/1980). The preapproval of the EPE’s trade name and distinctive title is valid for two (2) months from the date of its issuance. Within these two (2) months, the EPE has to set its right of use

137

138

The fact that the pre-approval of the EPE’s trade name and distinctive title consists a formation requirement, although not mentioned in the L. 3190/1955, is corroborated by the provision of art. 5a par. 1 sub. a L. 1089/1980, which prohibits the Clerk of the First Instance Court from registering in the Book of Companies and certifying any formation, amendment or dissolution agreement, concerning an EPE or a personal company, if these agreements are not accompanied by the certificate of the pre-approval of the company’s trade name and distinctive title, rendered by the competent Chamber. The absence of the pre-approval would therefore render the fulfillment of the EPE’s publication requirements impossible. Which Chamber (of Commerce, Industry, Arts and Crafts etc.) is competent, is determined by the declared object (industrial etc.) of the EPE in formation.

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of its trade name and distinctive title final by registering (“announcing its business start”) at the competent Chamber (arts. 4 and 5a par. 1 sub. c L. 1089/1980). bb) Adoption of the articles of association

153 The EPE’s formation contract,139 called otherwise “company agreement” or “articles of association” (statutes) and in the Greek terminology: “etairiki simvasi”, “katastatiko” or “simfonitiko sistasis EPE”, differentiates the concrete EPE from the others by regulating its structure and operation. The most important formality for the conclusion of the EPE’s formation contract is that it may only be drawn up by means of a notarial deed,140 which has a mandatory content141 (art. 6 pars. 1 and 2 L. 3190/1955). If it is not notarized, it will be void and the EPE may also be declared void by a court decision after an action of any person having a lawful interest (art. 7 pars. 1 sub. a and 2).142 Except for the districts of the Bar Associations of Athens and Piraeus, where the attorney presence is only compulsory, when the company capital exceeds EUR 29,347,03 (art. 42 L. D. 3026/1954, as amended by art. 37 L. 2915/2001), a draft of the statutes must be always prepared and signed by an attorney on the basis of the agreements between the founders. This draft is, subsequently, submitted together with the receipt for payment of the attorney fees,143 the full and accurate identity particulars of the founders and the pre-approval certificate of the EPE’s trade name and distinctive title to the notary public, who draws up the final formation contract (statutes) of the EPE. The formation deed must be signed by all partners (individuals144 or corporations), called during the formation stage “founders” and afterwards “company members” (“etairoi”), or by their proxies, in which case the respective notarized power(s) of attorney must be submitted to the notary. The formation of an EPE by only one person is in the meantime possible also in Greece (Single Member EPE, “Monoprosopi EPE”, art. 43a L. 3190/1955). cc)

Payment of the capital, capital concentration tax and other fees

154 The capital of an EPE may not be less than EUR 18,000,– and must be fully paid up145 by the company members at the time of the conclusion of the company’s formation contract (art. 4 par. 1, art. 6 par. 2 sub. e), otherwise the EPE is void (art. 7 par. 1 sub. a). At 139

140 141 142

143 144

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Greek law makes no distinction between the formation deed and the articles of association, but they are one and the same document. The notarial deed is a registered public document. See below under III.5. a). Void will be also the preliminary agreement about the conclusion of the EPE’s formation contract as well as the agreement about the forfeiture of a penalty clause in case of nonsignature of the company’s formation contract, if they do not embrace the form of a notarial deed (art. 166 C. C.). The preliminary agreement must additionally include the mandatory content of the company’s formation deed, which is going to be signed, as this is provided for in art. 6 par. 2 L. 3190/1955. Such receipt is rendered to the founders by the competent Bar Association. Individuals must have the legal capacity to contract. If none of the founders has the legal capacity to contract at the time, the EPE’s formation deed is signed, this will be void and the EPE may also be declared void by a court decision (art. 7 par. 1 sub. c L. 3190/1955). Neither a partial payment nor a public subscription of the EPE’ share capital is possible.

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least half of the minimum capital, i. e. EUR 9,000,– must be paid up at that time in cash (art. 4 par. 1). At this stage, i. e. of the EPE’s formation, the capital represents the property, which must be paid up by the company members to the EPE in form of contributions. The kind of contributions is stipulated in the company’s formation contract and they may be in cash and in kind, provided that each in kind contribution is a property asset susceptible of inclusion in the balance sheet (art. 5 par. 1). Contributions in kind, such as real estate, negotiable securities, intangible assets (patents, copyrights, know-how) etc., must be evaluated by an official Committee of Experts146 prior to the EPE’s formation or to any subsequent capital increase (art. 5 par. 2 L. 3190/1955, referring to art. 9 L. 2190/1920). Within fifteen (15) days after the signature of the EPE’s formation contract the tax of 155 the capital concentration must be paid up to the Public Financial Authority of the district, where the registered office of the EPE in formation is located. The amount of this tax corresponds to 1% of the company capital (arts. 17-31 L. 1676/1983). To this effect a statement must be filled in and submitted together with copies of the EPE’s formation contract to the competent Financial Authority, which certifies the payment of the tax.147 dd) Publication

The L. 3190/1955 (art. 8) requires for the formation of an EPE the fulfillment of a double 156 publication system: (1)

Registration in the Book of Companies

The copy of the EPE’s formation contract, which has been countersigned by the Public 157 Financial Authority, together with the pre-approval certificate concerning the company’s trade name and distinctive title must be submitted within one (1) month from the date of signature of the EPE’s formation contract (statutes) on the initiative of every company member or manager and obligatorily by the notary public to the Clerk’s Office of the First Instance Court of the district, where the registered office of the EPE in formation is located (art. 8 par. 1 L. 3190/1955). The Clerk enters the company’s formation contract in the Book of Registration of the Companies with Limited Liability, without exercising a control of legality. The original copy of the company’s formation contract, filed with the Clerk of the First Instance Court, remains in the archive of the Court and at least two (2) precise certified copies of it are returned to the EPE (one of

146

147

The valuation by the Committee of Experts (see above II.4. b)) is also necessary, when the EPE acquires real estate or other objects for the purpose of constant exploitation from company members or managers or relatives thereof up to the second degree of relation. In the case the acquired object has not been subjected to valuation, the respective contract is null and void with regard to the EPE (art. 5 par. 3 L. 3190/1955). The founders of an EPE to be established in the district of the Athens First Instance Court must, additionally, submit the certified copy of the company’s formation contract to the Lawyers’ Relief Fund (“Tameio Pronoias”), to which a fee, corresponding to 1% of the company capital, must be paid. The Lawyers’ Relief Fund countersigns the copy, certifying the payment of the fee.

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them is kept in the company’s archive and the second one is further submitted to the Public Financial Authority). (2)

Publication of the announcement in the Bulletin of Companies Limited by shares and Companies with Limited Liability of the Government Gazette 158 After the registration of the EPE’s formation contract (statutes) in the Book of Com-

panies, kept by the First Instance Court, an announcement about this registration, in the form of a summary of the EPE’s statutes, must be published in the Government Gazette and namely in the Bulletin of Companies Limited by shares and Companies with Limited Liability (“Teuchos Anonimon Etairion kai Etairion Periorismenis Euthinis”, “TAE & EPE”) on the initiative of every company member or manager and at the expenses of the interested company (art. 8 par. 2). The summary of the EPE’s formation contract (statutes) is drawn up and signed by a partner or manager or the notary and it must contain: the full names of the company members, the EPE’s trade name, registered office, object and duration, the amount and way of payment of its capital as well as the number and value of the company parts, the full names of the managers, if there are any appointed by the statutes and how they represent the company, the serial number of the notarial deed and the name of the notary public, who has prepared it, as well as the EPE’s registration number in the Book of Companies (art. 21 par. 3 L. 1599/1986). The text of such summary-announcement to be published must necessarily be previously countersigned by the competent Clerk of the First Instance Court (art. 8a par. 3 L. 3190/ 1955). ee)

Additional formation steps

159 The EPE acquires its legal personality and therefore begins to exist, as soon as the publication requirements, stipulated in art. 8, have been fulfilled, i. e. the summary of the company’s formation contract (statutes) has been published in the Bulletin of AE and EPE of the Government Gazette (art. 9 par. 1 L. 3190/1955). Nevertheless, the following actions must, additionally, occur: – Announcement of the EPE’s business start to the competent Chamber. The new EPE finalizes through its registration at the Chamber its right to use the specific trade name and distinctive title (art. 4 par. 1 and art. 5a par. 1 sub. b L. 1089/1980). – Declaration of the EPE’s business start to the competent Public Financial Authority and endorsement of the company’s Books and particulars by it. – Opening of a bank account in the name of the EPE, at the discretion of the founders. 160 Actions, aiming at the formation of an EPE, are effected by its founders, who may even appoint as proxy for the conduct of such actions one of them or a third person by means of a written power of attorney, usually included in the company’s formation deed. From the date of signature of the notarial deed of the EPE’s statutes until the completion of the publication formalities (publication in the Bulletin of AE and EPE of the Government Gazette), none of the partners may withdraw from the company and the death, bankruptcy or incapacitation of any of them do not constitute impediments to the fulfillment of the formation requirements (art. 8 par. 5). Furthermore, the persons (founders or third persons), who have entered into agreements in the name of the company 360

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in formation,148 are fully, jointly and severally liable for such transactions, unless the EPE undertakes the liabilities deriving therefrom within three (3) months after the acquisition of its legal personality through the respective publication in the Government Gazette. In that case the EPE is solely liable (art. 9 L. 3190/1955). For agreements, entered into before the signature of the company’s statutes, the foun- 161 ders of the EPE are personally, jointly and severally liable and the EPE is free to take over the obligations, deriving from such agreements, after the acquisition of its legal personality and according to the law provisions on the assumption of a debt (arts. 471 ff. C. C.). b)

Costs/Duration

In practice, most of the Companies with Limited Liability, which are established nowa- 162 days in Greece, satisfy only the minimum share capital, required by the law (art. 4 par. 1 L. 3190/1955), i. e. EUR 18,000,–. The costs for the formation of an EPE with a capital of EUR 18,000,– amount to approximately EUR 750,–,149 whereas in such calculation are included the attorney and notary fees,150 other fees (Chamber etc.), costs of publication in the Government Gazette and the capital concentration tax. For the approximate calculation of the duration of the EPE’s formation stage, following 163 considerations must be taken into account: the pre-approval of the company’s trade name and distinctive title by the competent Chamber is usually rendered within a couple of days after the filing of the relevant application by the founders; the preparation of the draft of the statutes by the attorney and of the final formation deed (statutes) by the notary public may be completed within a couple of days or a couple of weeks depending on whether the founders agree about all the matters of the statutes and provide both their attorney and the notary with the necessary information and documents. Finally, the duration of the publication process (registration in the Book of Companies, publication of the announcement in the Government Gazette) depends mainly on how busy the respective authorities (Clerk’s Office of the First Instance Court, National Printing Office) are.

148

149

150

About the nature of the EPE in formation, see Piraeus Court of Appeal 4/91, EEmpD 33, 87, according to which an EPE in formation has not a “particular and independent legal personality, but it constitutes a civil law partnership” (arts. 741 ff. C. C.), the object of which is the conduct of a number of actions leading to the establishment of a Company with Limited Liability. For EPE established in the district of the Athens First Instance Court, the formation costs amount to approximately EUR 950,–, since an additional fee equal to 1% of the capital must be paid to the Lawyers’ Relief Fund. The amount of the notary fees depends a. o. on the number of pages, the formation contract of the EPE has. As basis for the notary fees, included in the aforementioned calculation, is taken a notarial deed of 6 pages and 2 copies.

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c)

Requested information on the EPE’s printed material

III. Company with Limited Liability – Etairia Periorismenis Euthinis (EPE)

164 Every document of the EPE in printed form must state at least the following particulars of the EPE (art. 4 par. 5 L. 3190/1955): – its trade name, – its capital, – the Book of Companies, in which the EPE has been registered, – its registration number and – its registered office.

3.

The company member

a)

Rights and duties of the company member

165 A person may become partner of an EPE either by assuming its shares during the EPE’s formation or capital increase or by acquiring shares by means of a contract of sale etc. or due to inheritance. Not only Greek or foreign individuals, but also other companies may participate in the EPE, if they have legal personality and they are not qualified as merchants merely through their participation in the EPE. 166 The rights of the company members are distinguished into “administrative” and “property” rights. The members of an EPE enjoy the following administrative rights: – the right of participation in the management and representation of the EPE, unless the company’s articles of association or the Meeting of company members have already appointed one or more persons, partners or non partners for this purpose (art. 16 and art. 17 par. 1 L. 3190/1955), – the right to participate in the Meeting of company members and to vote. In particular, every company member is entitled to at least one (1) vote in the Meeting and if he owns more than one company parts (shares), the number of votes, he may cast at a Meeting, is proportional to the number of company parts he holds (art. 12 par. 1). The voting right may be also exercised by proxy. – the right to inspect the books and documents of the EPE and be informed about the development of the company’s affairs either in person or by proxy during the first ten (10) days after the end of each calendar quarter. Furthermore, every partner is entitled to obtain, at his own expenses, extracts from the Book of Company Members and the Book of Minutes of the Meetings (art. 25). A contrary provision of the articles of association is null and void (art. 34 L. 3190/1955). – the right to cause the convocation of the members’ Meeting (art. 10 par. 3, referring to art. 11 par. 2 L. 3190/1955), – the right to file an action against the manager(s) for violation of the provisions of the law or of the articles of association or for faults related to the management (art. 26), – the right to challenge a resolution of the members’ Meeting, taken in violation of the law or the articles of association (art. 15 pars. 1 and 2 L. 3190/1955) and – the right to withdraw from the company (art. 33 pars. 1 and 2 L. 3190/1955).

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Administrative rights, accorded by the law to the minority of company members, are: 167 – the right of one or more company members, representing at least one twentieth (1/ 20) of the capital, to request the convocation of an extraordinary Meeting of partners, specifying the object of the agenda issues (art. 11 par. 1) and – the right of one or more company members, representing at least one tenth (1/10) of the capital, to request by means of a petition, submitted to the Court, the dissolution of the EPE due to an important reason (art. 44 par. 1 sub. c) as well as the removal for serious reasons of the liquidators, appointed by the members’ Meeting (art. 47 par. 4 L. 3190/1955). As property rights of the EPE’s partners may be characterized: – the right to the profits and – the right to the proceeds of liquidation.

168

The main duties of the company members are: 169 – the duty to pay up their contributions, when they subscribe the capital at the time of the company’s formation or upon any capital increase and – the duty of loyalty towards the EPE, which finds its manifestation in their duty to vote in favour of the company’s interests and generally to promote the company’s objects, acting in trust and confidence (good faith) owed to the EPE. The duty of loyalty does not obligatorily include the prohibition of competition on the part of the company members, unless the statutes provide otherwise. The statutes may, namely, impose on the company members several further duties, 170 which provide the EPE with a more personal character, such as: – the duty not to compete (art. 20 par. 2 L. 3190/1955) against the EPE, – the duty to other ancillary contributions, e. g. provision of services or transfer of intangible assets to the EPE and – the duty to supplementary contributions, aiming exclusively at the balance of losses, which have been certified in the balance sheet (art. 36 par. 1). The provisions of the statutes related to supplementary contributions are only valid, if they determine the amount of such contributions, which in no case may be higher than the initial capital (art. 36 par. 2). The payment of supplementary contributions is resolved by the Meeting of partners by a majority of 3/4 of the total number of partners, representing 3/4 of the total company capital (art. 36 par. 3, referring to art. 38 par. 1). All company members must pay the supplementary contributions pro rata of their participation in the capital within one (1) month from the invitation, addressed to each of them in writing. Such obligation may not be fulfilled by means of an offset (art. 36 par. 4). A company member, who violates his duty to pay his supplementary contribution within the time limit mentioned above, is excluded from the EPE and his participation portion is subject to sale pursuant to a court decision151 after a petition of the EPE itself, any manager or company member (art. 37 par. 1). In

151

This is a decision of the Single Member First Instance Court, adjudicating according to the procedure of interim measures (arts. 682 ff. Civil Procedure Code).

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171

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that case, the person, who acquires the participation portion of the excluded company member, is not obliged to pay the supplementary contribution due (art. 37 par. 4 L. 3190/1955). b)

The Meeting of company members

171 The Meeting of the company members is the supreme organ of the Greek EPE and is entitled to decide on every company affair, its resolutions also binding the absent or dissenting company members (art. 14 par. 1 L. 3190/1955). To the exclusive authority of the members’ Meeting belongs the adoption of resolutions concerning the following matters (art. 14 par. 2): – the amendment of the articles of association, – the appointment and removal of the managers as well as the discharge from their liability, – the approval of the annual balance sheet and of the distribution of profits, – the filing of an action against the company organs or the company members as such, – the extension of the company’s duration, merger, dissolution and appointment or removal of liquidators and – any other matter, specified by the law, e. g. the appointment of auditors in the case of large EPE152 (art. 23 par. 1 L. 3190/1955). aa)

Distinctions of the members’ Meeting

172 The Meeting of the company members is distinguished into an “ordinary” and an “extraordinary” one. An ordinary Meeting is convened at least once a year within the first three (3) months after the end of the previous fiscal year (art. 10 par. 3 L. 3190/ 1955). An extraordinary Meeting, on the contrary, may be convened at any time by the manager(s), whenever the company’s interests demand it and when the minority of partners requests it (art. 11 par. 1 L. 3190/1955). Further, the Meeting is distinguished into an “exceptional” or “statutory” one, passing resolutions upon important matters, such as the amendment of the articles of association (art. 14 par. 2) and into a “common” one, deciding upon common matters. bb) Convocation of the members’ Meeting

173 The Meeting of partners is convened by the EPE’s managers. The company members are invited in writing, the invitation being served on their address at least eight (8) days prior to the Meeting’s session. The invitation must specify at the same time the day, hour and place of the meeting as well as the agenda issues to be discussed (art. 10 par. 2). However, the convocation of the Meeting is not subject to the above formalities, when all company members agree to it, whether in writing or by not objecting. In addition, if all company members are present at the convened meeting and none of them objects thereto, they may decide validly on any issue, for which the Meeting is competent, even if this does not belong to the agenda issues, entered for discussion (art. 10 par. 4 L. 3190/ 1955). 152

364

See below under III.7. b).

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The managers are, in principle, free to convene the Meeting, but they are also obliged 174 to, when the law (art. 10 par. 3, art. 45 L. 3190/1955) or the statutes require so or when the minority of the company members (one or more partners, representing at least one twentieth (1/20) of the capital, art. 11 par. 1) requests it. In particular, the law (art. 45 par. 1) imposes on the managers the obligation to convene the members’ Meeting, in the case of loss of one half (1/2) of the company’s equity, in order to decide on the dissolution of the EPE or the capital reduction. If the managers fail to convene an ordinary Meeting at least once a year and within the first three (3) months after the end of each fiscal year or an extraordinary Meeting within twenty (20) days from the service of the minority’s request, the Meeting may be convened by any company member or the minority respectively, pursuant to a court decision153 (arts. 10 par. 3 and 11 par. 2 L. 3190/1955). cc)

Resolutions of the members’ Meeting

The resolutions of the EPE’s partners are taken in the course of a meeting (art. 10 par. 1 175 L. 3190/1955). As already mentioned,154 every company member, whose name has been entered into the Book of Company Members (art. 25 sec. 1), has not only a right to participate in the Meeting, but also a voting right. (1)

Majority requirements

For the adoption of a valid resolution by the members’ Meeting, the law requires a two 176 tier absolute majority, i. e. a majority of both persons and capital. More specifically, the resolutions of the Meeting are taken by a majority of more than half (1/2) of the total number of partners, representing more than half (1/2) of the total company capital, unless the law or the statutes provide otherwise (art. 13 L. 3190/1955). Resolutions of the Meeting on the amendment of the articles of association (including capital increase or reduction,155 arts. 40 par. 1 and 41 par. 1) are passed by a two tier qualified majority of at least three quarters (3/4) of the total number of partners, representing three quarters (3/4) of the total company capital (art. 38 par. 1 L. 3190/1955). Finally, unanimity, i. e. the consent of all the company members is required for any resolution concerning: a) a change in the nationality of the EPE and b) an increase in the obligations of the partners or of their liability as well as a limitation of the rights, granted to them by the statutes, unless the law provides otherwise (art. 38 par. 3). Moreover, a unanimous decision of the members’ Meeting is required for: a) the discharge of the manager(s) from the prohibition, imposed on them, not to compete against the EPE (art. 20 par. 1), b) the inclusion at a later stage in the statutes of the agreements, provided for in art. 6 par. 3156 and c) the change of the EPE’s business object from a commercial to a noncommercial one (art. 39). The statutes may prescribe for the adoption of resolutions by the members’ Meeting in respect of concrete matters a higher majority than that provided for by the law or even unanimity, but in no case a lower one because of the 153

154 155 156

Of the President of the First Instance Court of the district, where the EPE’s registered office is located, issued on the basis of the procedure of interim measures (arts. 682 ff. Civil Procedure Code). See above III.3. a). See below under III.5. c) aa) and III.5. c) bb). See below under III.5. a).

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mandatory character of the law provisions, regulating the majority requirements. The resolutions of the Meeting are registered into the Book of Minutes of the Meeting (art. 25 sec. 2), extracts of which may acquire every company member at his own expenses (art. 34 sec. 2 L. 3190/1955). 177 The exercise of the voting right by a company member is prohibited in the case of a resolution of the Meeting concerning: a) his discharge from the liability as a manager (art. 12 par. 2, referring to art. 14 par. 2 sub. b), b) the filing of an action against him by the EPE for damages, deriving from acts or omissions, committed by him as a manager or company member during the EPE’s formation or during its operation (art. 12 par. 2, referring to art. 14 par. 2 sub. d), c) his removal from the EPE’s management due to a serious reason, such as the gross violation of duty or incompetence related to the regular management (art. 19) or d) his exclusion from the company due to a serious reason (arts. 33 par. 3 and 37 par. 1 L. 3190/1955). (2)

Challenging of resolutions

178 Resolutions of the members’ Meeting, passed in violation of the provisions of the law or the statutes, are not ipso jure null and void, but voidable. They may be nullified by a decision of the First Instance Court of the district of the EPE’s registered office pursuant to an action, filed by the manager(s) or any company member against the EPE within three (3) months from the day, the challenged resolution was adopted. If the Meeting’s resolution is challenged by the manager(s), the Court appoints a special representative of the EPE for the conduct of the trial (art. 15 L. 3190/1955). The challenged resolution produces its results until the pronouncement of the court decision, which declares its nullity and is effective vis--vis every partner and manager of the EPE (art. 15 par. 4). After the court decision has become final, the challenged resolution is considered to be null and void ex tunc. This retroactivity may not, however, damage the interests of the third parties, who have acted in good faith. c)

Exclusion and withdrawal of the company member

179 The requirements for the exclusion of a company member from the EPE are (art. 33 par. 3): – the existence of a serious reason,157 – a resolution of the members’ Meeting on the exclusion of the company member, adopted by the common majority (of more than half (1/2) of the total number of partners, representing more than half (1/2) of the total capital, art. 13) and – a decision of the Multi Member First Instance Court, ordering the exclusion, pursuant to a petition of the manager(s) in the name of the EPE or of any company member. 180 The excluded partner has the right to receive from the EPE the value of his participation portion158 (art. 33 par. 3, referring to art. 29 pars. 1 and 4), specified by the same court decision ordering his exclusion, and retains the membership of the EPE until the 157

366

Such serious reason is e. g. the closure of the company’s store and non delivery of the company books to the EPE’s manager(s), see Athens Court of Appeal 10419/1984, Arm. 40, 848.

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payment has been effected. After such payment, the EPE continues to exist between the remaining partners (art. 33 par. 3 L. 3190/1955). The articles of association may contain provisions related to the right of each company 181 member to withdraw from the EPE under certain conditions, e. g. even at sole discretion without cause (art. 33 par. 1 and art. 6 par. 3). A partner may, further, withdraw from the EPE due to a serious reason159 and pursuant to a decision of the Single Member First Instance Court (art. 33 par. 2 L. 3190/1955, arts. 682 ff. C. P. C.), specifying at the same time the value of his participation portion. In any case, the payment to the withdrawing or excluded member of the value of his participation portion may be effected only after the amendment of the EPE’s statutes, resulting from the respective reduction of the company’s capital (arts. 43 par. 1 and 41 par. 2).160 If the company organs fail to cause the amendment of the statutes (capital reduction) under the conditions provided for by the law, the withdrawing or excluded member may request from the Court the dissolution of the EPE (art. 43 par. 2 L. 3190/1955).

4.

The EPE share

The L. 3190/1955 (arts. 4 par. 2 and 27) recognizes a double concept of participation of 182 a company member in the EPE: the “participation portion” and the “company part” (“share”, “etairiko meridio”). “Participation portion” is the concrete percentage of participation of each member in the EPE and it indicates the “partner” relationship between each company member and the legal entity, from which arises a complex of rights and duties. Each company member participates in the EPE with only one (1) participation portion, which consists of one or even more company parts (shares), if the value of his contribution is a multiple of the minimum value of the participation portion/company part, laid down in the statutes (art. 4 par. 2 L. 3190/1955). “Company part” or “share” is the minimum part, into which the EPE’s capital is divided and which a person has to pay, in order to become member of the EPE. Moreover, the share or more than one shares of each partner constitute(s) the portion of his participation in the EPE (art. 27 par. 1). The value of the share/participation portion must be fixed by the statutes at an amount of at least EUR 30,– or a whole multiple thereof, i. e. EUR 60,–, EUR 90,– etc. (art. 4 par. 2). In respect of in kind contributions, if the value of such contribution (as estimated by the special Committee of art. 9 L. 2190/1920) is less than EUR 30,– or the multiple thereof, specified in the statutes, it must be supplemented by the equivalent amount in Euro accordingly (art. 4 par. 3 L. 3190/1955). The share is not a negotiable security. There is only the possibility of issuance by the EPE of a document concerning the entire participation portion of a partner, which proves merely the identity of a person as member of an EPE and does not have the character of a

158 159

160

See below under III.4. A company member is entitled to withdraw from the EPE e. g. when the members’ Meeting has resolved the change of the EPE’s business object and he has dissented from such resolution (art. 39 L. 3190/1955). See below under III.5. c) bb).

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183

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negotiable security. Such document must contain the words: “Receipt not bearing the character of a negotiable security” in capital letters (art. 27 par. 2 L. 3190/1955). 183 The concept of the “company part” (EPE share) is governed by the principles of equality, indivisibility and transferability. According to the principle of equality, from each company part derive the same rights and duties. The principle of indivisibility (the company part may not be divided into sub-parts) manifests itself in the obligation, imposed by the law on the joint owners of a share, to designate a common proxy to the company in writing, in order to exercise the rights and duties, deriving from the share. If they fail to do so, the announcements of the EPE, made to one of them, entail results for all of them (art. 27 par. 3). Each of the joint owners is, further, fully liable for the obligations towards the EPE (art. 27 par. 4 L. 3190/1955, arts. 1113, 785 ff. C. C.). On the contrary, the participation portion is divisible, because one or more of the shares, constituting it, may split off and form a separate (individual) participation portion. Finally, the company part (share) is transferable and may be the object not only of ownership, but also of usufruct and pledge (arts. 1178, 1247 C. C.) and it is always susceptible of seizure (art. 30 L. 3190/1955). a)

Classes of shares

184 Unlike the law governing the AE (L. 2190/1920), the L. 3190/1955 does not provide for different classes of shares. The EPE’s statutes may, however, accord to or impose on certain partners differentiated rights or duties, e. g. preferred rights, but this is not usual in practice. b)

Transfer of shares

185 The company parts (shares) of the EPE may be transferred either by means of a contract inter vivos, e. g. sale, exchange, donation etc. or mortis causa, i. e. due to death, e. g. through inheritance or legacy (arts. 28 par. 1, 29 par. 1 L. 3190/1955). In respect of the transfer of shares inter vivos, the EPE’s statutes may prohibit such transfer or permit it only under certain conditions, such as the consent of all or certain company member(s) or the pre-emption right of all or certain of the other partners to buy such shares on an equal basis (art. 28 par. 2). Such restrictions may also be included in the statutes or be cancelled at a later stage by a unanimous resolution of the members’ Meeting (amendment of the statutes, art. 38 par. 3 sub. b L. 3190/1955). In any case, the transfer of the EPE’s shares inter vivos may be effected only by means of a notarial deed, which states a. o. the names, occupations, residences and nationalities of the contracting parties as well as the object of transfer (number and value of shares) (art. 28 par. 3 L. 3190/1955). The notary fees for a contract of transfer of shares of an EPE are calculated on the basis of that value of the shares transferred (true value, nominal value, purchase price), which is higher.161 161

368

The presence of an attorney, who prepares the draft of such contract is compulsory, if the value of the shares transferred exceeds the amount of EUR 29,347,03 in the districts of the Bar Associations of Athens and Piraeus and EUR 11,738,81 in the districts of the other Bar Associations of the Greek State.

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Concerning the transfer of shares mortis causa, e. g. due to inheritance, the statutes may 186 not prohibit such transfer, but they may provide that the share(s) of the deceased partner, transferred to his heir, shall be bought from him by a person, designated by the EPE, at their true value, specified by the Court162 (art. 29 par. 1 L. 3190/1955). Such designation may be effected by the EPE within one (1) month from the entry of the transfer in the Book of Company Members by means of a statement, addressed to the heir or legatee and notified to the partners of the EPE, who have a pre-emption right in regard to such buying out, if they declare their intention to the EPE in writing within one (1) month. In case of exercise of the pre-emption right by more than one partners, they are all entitled pro rata of their participation in the EPE (art. 29 par. 2). In any case of transfer of the shares of an EPE (between the living or due to death), the 187 transfer must be subjected to the publication formalities of art. 8 L. 3190/1955 on the initiative of the transferor, transferee, heir or legatee respectively (submission of the respective document (contract of sale, heir’s or legatee’s authorization documents) to the Clerk’s Office of the First Instance Court for the purpose of registration in the Book of Companies – publication of the announcement concerning the registration in the Government Gazette) (art. 31 par. 2). Finally, the transfer of the shares is effective with regard to the EPE, as soon as it is registered in the Book of Company Members163 upon request of the transferor, transferee, heir or legatee, who submits a certified copy of the respective document (notarial deed of contract of sale, heir’s legitimation) to the EPE (art. 28 par. 3, art. 29 par. 3 L. 3190/1955). c)

Own shares

The EPE may under no circumstances acquire its own shares (art. 28 par. 4 L. 3190/ 188 1955), because such acquisition would lead to the reduction of the company’s property to the detriment of the creditors’ interests. A violation of this provision has as a consequence the absolute nullity of the respective contract.

5.

The articles of association of the EPE

a)

Mandatory content

As mentioned above, Greek law makes no distinction between the formation deed and 189 the articles of association (statutes) of the EPE, but they are one and the same document. The law lays down the mandatory content of the company’s statutes, which may be supplemented by the founders with optional agreements. The EPE’s articles of association must, therefore, state obligatorily the following (art. 6 par. 2 L. 3190/1955):

162

163

This is a decision of the President of the First Instance Court on the basis of the procedure of arts. 682 ff. C. P. C. In this Book, provided for in art. 25 sec. 1 L. 3190/1955 and kept by the EPE’s manager(s), are entered all the particulars, concerning the partners of the EPE.

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190

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– The name, surname and occupation of the company members, their place of residence and their nationality and if they are other corporations, their trade name and registered office. – The company’s trade name. This is either composed of the name of one or more of the partners or determined by the object of the business, in which the EPE is engaged, or formed by a combination of both these possibilities. In any case, the words “Etairia Periorismenis Euthinis”, i. e. “Company with Limited Liability” must be included in full in the trade name, except for the daily transactions, within the scope of which the company is free to use the abbreviation “EPE” (art. 2 L. 3190/ 1955). – The registered office and business object of the EPE. The registered office of the EPE must be situated in a Municipality (“Dimos”) or a Community (“Koinotita”) of the Greek territory. As far as the business object of the company is concerned, it has already been mentioned164 that the EPE is a commercial company ex lege, i. e. even if its purpose is not the carrying out of a commercial undertaking (art. 3 par. 1). Nevertheless, the law (art. 3 par. 2 L. 3190/1955) prohibits the EPE from being established, in order to carry out an enterprise, for the conduct of which another company form is exclusively provided for by the law, e. g. banks and insurance companies may be formed only as Companies Limited by shares (AE). – The form of the company as one of “limited liability”: “Etairia Periorismenis Euthinis”. – The amount of the company capital, the participation portion of each company member, including the company parts (shares) corresponding to each participation portion and the affirmation on the part of the founders that the capital has been already fully paid up. The minimum capital of a Greek EPE is EUR 18,000,– (art. 4 par. 1), while the law prescribes no maximum limit for the share capital. – The object of the contributions in kind (if there are any), their valuation and the names of the contributing members as well as their total value. – The duration of the company. It is not allowed to an EPE to have an indeterminate duration, but the omission of the designation of the EPE’s duration in the statutes does not produce any more the nullity of the company (art. 7 par. 1 sub. a, not referring to art. 6 par. 2 sub. g L. 3190/1955). 190 Beyond their obligation to state in the statutes the aforementioned mandatory information, the founders of an EPE are, in principle, free to meet within the framework of the company’s statutes agreements about the company’s structure and operation, concerning especially the legal relationships between each other and with the legal entity of the EPE, such agreements providing the company with a more personal or more capital character. There is, however, a number of subjects, which must be regulated by the initial statutes or otherwise their regulation may be introduced at a later stage only by a unanimous resolution of the members’ Meeting (art. 38 par. 3). The law (art. 6 par. 3 L. 3190/1955) provides, namely, that certain agreements among the company members are only valid, if included in the “incorporating document” of the company, i. e. the EPE’s statutes. These agreements may concern the following subjects: supplementary contributions, other ancillary contributions of the company members, not 164

370

See above under III.1.

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consisting in contributions in cash or in kind, the prohibition of competition on the part of the company members, the prohibition of transfer or transfer under certain conditions of the participation portion, the withdrawal of members, the dissolution of the company for reasons not provided for by the law and, eventually, the supervision of the company’s management. The statutes may in no case contain provisions that oppose to mandatory law. b)

Amendment of the articles of association

The amendment of the EPE’s articles of association belongs to the exclusive authority of 191 the members’ Meeting and this authority may not be assigned to another company organ or person (art. 14 par. 2 sub. a L. 3190/1955). For the amendment of the statutes, the law (art. 38 par. 1 L. 3190/1955) requires a resolution of the members’ Meeting to this effect, adopted by the qualified majority of at least three quarters (3/4) of the total number of company members, representing three quarters (3/4) of the entire company capital. The resolution of the members’ Meeting on the amendment of the statutes must embrace the form of a notarial deed165 (art. 38 par. 2) and be subjected together with the entire new text of the statutes to the same publication formalities166 as the initial statutes (art. 38 par. 4, art. 8 L. 3190/1955). Prior to the compliance with the above formalities (notarization-publication), the amendment of the statutes produces no legal effect (art. 38 par. 4). c)

Capital increase/reduction

aa)

Capital increase

The law (art. 40 L. 3190/1955) regulates only the “real” increase of the EPE’s capital. 192 However, a “nominal” capital increase through the capitalization of the company’s reserves is always possible, subject to valuation requirements. An increase of the EPE’s capital requires the amendment of the company’s articles of association and must be resolved by the exceptional Meeting of partners with the qualified majority (of at least three quarters (3/4) of the total number of company members, representing three quarters (3/4) of the total company capital) (art. 40 par. 1, referring to art. 38 par. 1).167 If the articles of association do not provide otherwise, every company member has a preemption right to the assumption of the new company parts (shares) pro rata of his original participation in the company capital (art. 40 par. 3). The subscription of the new capital is effected either by the already existing partners or by third parties by 165

166 167

The presence of an attorney during the signature of the notarial deed is only compulsory, when the amendment of the statutes concerns the transfer of shares or the capital increase. In the districts of the Bar Associations of Athens and Piraeus the attorney presence is only compulsory, when the EPE’s capital exceeds EUR 29,347,03 (art. 37 L. 2915/2001). See above under III.2. a) dd). In practice, the members’ Meeting resolves the capital increase or reduction and submits afterwards a certified copy of the minutes of the meeting to the notary public, who draws up the notarial deed on the amendment of the EPE’s statutes due to the capital increase or reduction. Such notarial deed must be subsequently subjected to the publication formalities of art. 8 L: 3190/1955.

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193

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means of a written statement, addressed to the EPE, within twenty (20) days after the resolution of the Meeting on the capital increase (art. 40 par. 2). Within ten (10) days after the lapse of the above-mentioned twenty (20)-day period, a notarial deed must be drawn up between the manager(s) of the EPE and those, who have assumed the company parts. The payment of the assumed company parts (shares) may not be effected by means of an offset (art. 40 par. 4 L. 3190/1955). bb) Capital reduction

193 A reduction of the EPE’s capital occurs e. g. in the case of payment of the value of his participation portion to a withdrawing or excluded company member (art. 41 par. 2), either through the reduction of the nominal value of the shares or through the cancellation of some of them. Similar to the capital increase, the reduction of the EPE’s capital is effected only by an amendment of the articles of association pursuant to a resolution of the exceptional Meeting of partners, passed by the qualified majority (of at least three quarters (3/4) of the total number of company members, representing three quarters (3/4) of the entire company capital, art. 38 par. 1) (art. 41 par. 1). The resolution on the capital reduction must state the purpose of such reduction, the amount thereof as well as the way, the capital reduction must occur (art. 41 par. 1) and it is subject to a strict publication procedure, created to protect the interests of the EPE’s creditors. In particular, the amendment of the statutes due to the capital reduction may be effected only after the lapse of two (2) months from the publication on the initiative of the managers once in the Government Gazette (TAE & EPE) (art. 8 par. 2) and at least twice in a daily newspaper, published in the district of the registered office of the EPE, of a summary of the respective resolution, provided that none of the company’s creditors has addressed his objections to the company in writing prior to the last publication (art. 42 par. 1). Despite the objections of the creditors, the Court168 may permit the reduction of the capital upon petition of the EPE, if it deems that the EPE’s capital is sufficient for the satisfaction of the objecting creditors or if the company provides sufficient securities (art. 42 par. 2). The EPE’s capital may not be reduced to an amount less than EUR 18,000,– and the nominal value of each share to an amount less than EUR 30,– (art. 41 par. 3 L. 3190/1955).

6.

Managers of the EPE

194 The organs of a Greek Company with Limited Liability are, as already mentioned, the Meeting of the company members and the managers. While the members’ Meeting as the EPE’s supreme organ has the power to decide on every company affair (art. 14 par. 1), the management of the company affairs and the representation of the EPE belong to the competence of the company’s managers. The managers could be, therefore, regarded as the executive organ of the EPE, which realizes the will of the legal entity, expressed by the members’ Meeting and at the same time carries out any act, which leads to the fulfillment of the company’s business object.

168

372

President of the First Instance Court, adjudicating according to arts. 682 ff. Civil Procedure Code.

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The administration of the EPE may be exercised by at least one or more managers, 195 partners or non-partners. Manager of an EPE may be any individual or corporation, merchant or not, Greek or Foreigner, even a natural person with a restricted capacity to contract. An exception applies in respect of the Civil Servants and the full and associate Professors of the Universities of Athens and Thessaloniki as well as of other equivalent University Schools, who are prohibited from being managers of an EPE (art. 17 par. 4). The law (L. 3190/1955) does not provide for a maximum number of managers of an EPE. The statutes may, however, lay down the maximum and minimum number of managers, set as a requirement for the assumption of the management by a person his membership of the EPE or another capacity, exclude some persons from the management or provide for substitutes of managers, who have forfeited their office for any reason whatsoever. a)

Appointment and removal of the managers

The manager(s) of the EPE may be appointed either by the articles of association or by a 196 resolution of the members’ Meeting for a definite or an indefinite period of time (art. 17 par. 1). If no managers are appointed, the management of the company affairs and the representation of the EPE belong to all the company members, acting collectively (“principle of legal collective management”, art. 16). The resolution of the members’ Meeting, appointing one or more managers, is taken with the common majority169 of more than half (1/2) of the total number of partners, representing more than half (1/2) of the entire company capital (art. 14 par. 2 sub. b and art. 13) and must state, whether the managers bind the company when acting individually or jointly (art. 17 par. 3). Otherwise, it is assumed that the managers act collectively (art. 17 par. 2). The same resolution is subject to the publication formalities of art. 8 (registration in the Book of Companies, publication of the respective announcement in the Government Gazette), such publication having merely a declaratory character. Defects regarding the appointment of the managers may not be invoked as against third parties, acting in good faith, if the publication formalities concerning their appointment have been complied with (art. 17 par. 3 L. 3190/1955). The office of a manager of the EPE is terminated, when he is removed by the members’ 197 Meeting or he gives up his function as a manager by resigning or due to death, legal incapacity or bankruptcy. In particular (art. 19 L. 3190/1955): – Removal of the manager(s), in the case the management has been accorded by the articles of association to one or more company members for a definite period of time. Manager(s) so appointed may be removed by the Court170 only due to a serious reason, such as the gross violation of duty or incompetence related to the regular management and only pursuant to an affirmative resolution of the members’ Meeting (art 13). After such resolution has been taken, a petition for the manager(s)’ removal may be brought to the Court by any company member. 169 170

Unless the articles of association provide for a higher majority. Single Member First Instance Court, adjudicating according to the procedure of voluntary jurisdiction (arts. 739 ff. C. P. C.) and in urgent cases on the basis of the procedure of interim measures (arts. 682 ff. C. P. C.).

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– Removal of manager(s), in the case the management has been accorded by the articles of association to one or more company members for an indefinite period of time. Such manager(s) may be removed at any time by a resolution of the members’ Meeting under the reservation of any claim for compensation on their part. 198 The aforementioned requirements for the removal of the manager(s) apply analogically, when the administration of the EPE belongs to all the company members, acting collectively (“legal collective management”, art. 16 L. 3190/1955). – Removal of manager(s), in the case the management of the EPE has been assigned by a resolution of the members’ Meeting to company members or third persons for a definite period of time. In this case, the removal is possible at any time by a resolution of the members’ Meeting, under the reservation of any claim for compensation of the manager against the EPE, especially for breach of contract or because the removal took place without serious reason. If the partners of the EPE are two (2), in case of disagreement, the managers may be removed by the Court only due to a serious reason without a resolution of the members’ Meeting. 199 Despite the silence of the law on this matter, the resignation of the manager(s) is always possible, if there is a serious reason. Resignation without a serious reason is only permitted, if the appointment was of an indefinite duration. The EPE has a claim for compensation against the resigning manager for damages resulting from his resignation. In any case of termination of a person’s, company member’s or not, function as manager of the EPE, such termination e. g. the Meeting’s resolution on the manager’s removal is subject to the publication formalities, stipulated in art. 8 (art. 17 par. 3 L. 3190/1955). b)

Duties and liability of the managers

200 The administration of the Greek Company with Limited Liability, entrusted to its managers, consists in: the management of the company affairs, i. e. the carrying out in the name of the EPE of every internal act, which leads to the fulfillment of the EPE’s business object and the representation of the company before the Court or generally before any public authority as well as in transactions with third parties (art. 18 par. 1 L. 3190/1955). The managers of an EPE have, therefore, extensive powers within the scope of the company’s business and as representatives of the EPE are “identified” with it171 without acquiring, however, the merchant capacity. From their competence are excluded only the issues, concerning the structure and organisation of the company as well as the control of its organs. The acts of the managers, even if they are outside the scope of the company’s business object, bind the EPE vis--vis third parties, except if the company proves that the third party was aware or ought to have been aware of such excess. The mere compliance with the publication formalities concerning the statutes or amendments thereof does not constitute proof per se of such awareness on the part of the third party. The powers of the managers may be limited either by relevant restrictive 171

374

As an expression of such “identification” with the legal entity of the EPE, the managers are not capable of testifying as witnesses in disputes, in which the EPE is a litigant, because they have an interest in the progress of the trial (Athens Multi Member First Instance Court 97/1995, DEE 1995, 516).

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provisions of the statutes or by a resolution of the members’ Meeting. Still, such restrictions of the managers’ powers may not be invoked as against third parties, even if they have been subjected to publication according to art. 8. Some of the main duties of the managers of the EPE are the following: 201 – the duty to cause the publication of acts and data (art. 8), the EPE is obliged to publish according to the law, – the duty to convene the members’ Meeting (arts. 10 and 11), especially in the case of loss of one half (1/2) of the company’s equity (art. 45), – the duty to draw up the inventory, the annual accounts of the EPE and the management report (art. 22 pars. 1 and 3), – the duty to keep, in addition to the commercial and tax books provided for by other laws, the Book of Company Members, the Book of minutes of the members’ meetings and the Book of minutes of the management (art. 25), – the duty to carry out the liquidation procedure (art. 46), – the duty to cause the proper payment of taxes and social security contributions and – the duty not to compete against the EPE (art. 20 L. 3190/1955). The manager of the EPE is not entitled to carry out on his account or on account of a third party acts falling within the scope of the EPE’s business object or to be partner of a General or Limited Partnership or of a Limited Liability Company pursuing the same purpose like the EPE he represents. The prohibition of competition may be revoked only by a unanimous resolution of the company members. In the case of violation of this prohibition on the part of the manager(s), the EPE may claim compensation or in lieu thereof it may demand, in the case of acts carried out on the manager’s own account, that such acts shall be deemed to have been carried out on the EPE’s account and in the case of acts carried out on account of a third person, that the remuneration due to him for such services shall be paid or his claim to such remuneration shall be assigned to the EPE. The above-mentioned claims of the EPE against its manager(s) are subject to a six(6)-month-prescription after the announcement of the committed acts to the members’ Meeting and in any case to a five(5)-year-prescription from their commitment. The managers of the EPE are personally liable and if they have acted in common, they 202 are jointly and severally liable against the EPE, each company member and third parties for damages brought about to the company due to violation by them of the law governing the EPE or of the statutes or due to faults (acts or omissions) related to the management (art. 26 par. 1). In the case of such liability, the members’ Meeting, without the participation of the liable manager(s), may decide the non-discharge of the manager(s) from their liability and the exercise of the company’s claims against them (art. 14 par. 2 subs. b and d). The liability of the managers vis--vis the company members and the third parties has only an ancillary character. This means that an action may be brought by the company members and/or the third parties against the managers, demanding the restitution of their “indirect damages” by means of the payment of the compensation to the EPE, only if the Meeting of the company members has rejected a proposal of the partners about the filing of an action against the managers in the company’s name or if no resolution upon this matter has been taken within reasonable time (art. 26 par. 2). The same applies, if the EPE has discharged the liable manager(s) from their liability or Vasiliki Vavitsa-Hohenau

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it has waived its claims against them. In any case, the claims against the managers are subject to a five(5)-year-prescription (art. 26 par. 2). If the company members or the third parties have suffered personal or direct damages by the acts or omissions of the managers, they may claim compensation by filing an action against the managers pursuant to the law provisions on torts (art. 914 Civil Code). 203 Apart from their civil liability, the managers may be penal liable for the reasons, provided for in art. 60 L. 3190/1955, they may be imprisoned because of debts of the EPE, owed to the State or to the Greek Institution of Social Security (IKA) (art. 69 KEDE) and they are personally and severally liable for the payment of taxes, owed by the EPE at the time of its dissolution, as well as for the payment of withheld taxes (art. 115 par. 2 L. 2238/1994). 204 According to the Greek case-law, the managers of the EPE may have a right of remuneration, only if the articles of association provide so or a resolution of the members’ Meeting has been taken to this effect. The remuneration does not convert the relationship between the managers and the EPE into a dependent labour relationship and it may consist either in percentages out of the company’s profits or in a concrete salary or in both of them.

7.

Accounting

a)

Annual financial statements (annual accounts)

205 As mentioned above,172 to the duties of the EPE’s managers belongs the preparation of the inventory, the annual financial statements (annual accounts) and the management report. In particular, once a year, namely at the end of each financial year,173 the managers are obliged to prepare an inventory of all the items of the assets and liabilities of the company with a detailed description of each item. On the basis of such inventory, the managers must proceed to the drawing up of the annual financial statements,174 172 173

174

376

See under III.6. b). The L. 3190/1955 contains no provision about the exact duration of the financial year. This is, thus, determined by the special provisions of art. 26 of the Code of Books and Particulars, i. e. the financial year has a twelve(12)-month-duration and only exceptionally it may have a shorter duration (in the case of the beginning, termination or interruption of the company’s transactions) or a longer one (only the first financial year), which, however, may not exceed twentyfour(24) months. While preparing the annual financial statements, the managers of a Company with Limited Liability may make use of the International Accounting Standards (IAS), adopted by the European Union, but only pursuant to a resolution of the Meeting of company members (art. 13 L. 3190/1955) concerning the application of the IAS for at least five continuous fiscal years (art. 134 par. 2 L. 2190/1920, introduced by art. 13 L. 3229/2004). In that case the annual accounts must be subjected to further publication requirements (publication in the Internet for the period of two (2) years) (art. 135 par. 2 sub. b, art. 136 par. 4 L. 2190/1920) as well as to a mandatory audit by Chartered Accountants (art. 137 par. 1 L. 2190/1920).

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which must present with absolute clarity the true financial position of the EPE, and submit them for approval to the members’ Meeting to be convened within three (3) months after the end of the fiscal year (art. 10 par. 3 L. 3190/1955). The annual financial statements (annual accounts) constitute a uniform unity, consist- 206 ing of the balance sheet, the “profit and loss account”, the “table of distribution of results” and the notes on the accounts (appendix) (art. 22 L. 3190/1955 and art. 42a par. 1 L. 2190/1920 on the Companies Limited by shares).175 The law governing the EPE (L. 3190/1955) contains no provisions regulating the way, the annual accounts have to be drafted, but it refers (art. 22 par. 2) to the respective provisions of the L. 2190/1920 on the Companies Limited by shares (arts. 42a, 42b, 42c, 42d, 42e, 43 and 43a), which apply analogically. The management report is not included in the annual accounts, but its preparation 207 consists an extra obligation of the manager(s) and is effected in accordance with the respective provisions of the L. 2190/1920 on the AE (art. 22 par. 3 L. 3190/1955, which refers to art. 43a par. 3 L. 2190/1920). Such report must contain a. o. a clear and true description of the business progress and the financial position of the EPE as well as information related to the anticipated development of the company (art. 43a par. 3 subs. a and b L. 2190/1920) and be addressed to the Meeting of the company members. The management report, concerning the large EPE,176 which are subject to a regular audit (art. 23 L. 3190/1955), must be submitted to the auditor(s) at least thirty (30) days prior to the members’ Meeting, so that the auditors may verify the agreement of its content with the annual financial statements (art. 43a par. 3 sub. c L. 2190/1920). Concerning the rest (small) EPE (art. 23 par. 2 L. 3190/1955), the law lays down no time limit; the management report may be, therefore, prepared at any time prior to the date of the meeting. The annual accounts and the relevant report of the managers and, if necessary, of the 208 auditors of the EPE are subjected, on the initiative of every partner or manager, to the publication formalities of art. 8 (art. 22 par. 4 L. 3190/1955). In particular, the respective documents must be submitted to the Clerk of the First Instance Court, in order to be registered in the Book of Companies in due time, so that the announcement of such registration together with the whole text of the initial annual accounts, except for the appendix, and of the audit certificate177 can be published at least twenty (20) days prior to the session of the members’ Meeting in the Bulletin of Companies Limited by shares and Companies with Limited Liability of the Government Gazette. The same documents must be published in the daily or weekly newspapers,178 provided for in art. 43b par. 5 subs. b and c L. 2190/1920, applying analogically (art. 8 par. 2 and art. 22 par. 4 L. 3190/1955). If the members’ Meeting has amended the annual accounts, these must be registered anew in the Book of Companies and published in the Government Gazette

175 176 177

178

See above under II.9. a). See below under III.7. b). If the audit of the annual accounts by Chartered Accountants is required by the law, like in the case of large EPE (art. 42a par. 6 L. 2190/1920). See below under III.7. b). See above under II.9. a) aa).

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within twenty (20) days after the adoption of the resolution amending them (art. 8 par. 2 sec. 2 L. 3190/1955). b)

Audit requirements

209 Only the large Companies with Limited Liability179 are obliged to appoint at least one (1) Chartered Accountant180 for the audit of their annual accounts (art. 23 par. 1 L. 3190/1955, referring to art. 36 par. 1 L. 2190/1920), before the Meeting of partners may decide validly upon (approve or amend) them. Large EPE are considered to be these, which exceed, on the closing date of their balance sheet, the numerical limits of two of the following three criteria, stipulated in art. 42a par. 6 L. 2190/1920: – a balance sheet total of EUR 1,500,000,–, – a net turnover of EUR 3,000,000,– or – an average number of 50 employees during the respective accounting period. 210 The auditors are appointed by the Meeting of partners and their appointment is subjected to the publication requirements of art. 8 (art. 23 par. 1 L. 3190/1955). In respect of the duties of the auditors and the way, the audit of the annual accounts is effected, the provisions of arts. 36, 37 and 43a par. 4 L. 2190/1920 governing the AE apply accordingly.181 The EPE, not exceeding two of the three aforementioned numerical limits are, therefore, exempt from the obligation of having their annual accounts audited and they have, in addition, the right to draw up a summarized appendix and publish a summarized balance sheet (art. 23 par. 2 L. 3190/1955 and arts. 43a par. 2 and 42a par. 6 L. 2190/ 1920). The manager(s) of such EPE are penal liable (art. 458 Penal Code) for any infringement of the law provisions concerning the preparation of the annual financial statements and the management report (art. 23 par. 3, referring to art. 22 L. 3190/1955). c)

Distribution of profits and setting up of reserves

211 As „net profits“ of a Company with Limited Liability are defined those, deriving from the actual gross profits of the company after the deduction of all expenses, losses, legal depreciation and any other corporate burden (art. 45 par. 1 L. 2190/1920, applying analogically). The net profits of the EPE are distributed as follows (art. 45 par. 2 L. 2190/ 1920): – the amount, specified by the law (20 %, art. 24 L. 3190/1955) or the statutes for the formation of a regular (ordinary) reserve, is retained, – the amount, required for the distribution to the EPE’s partners of the first (initial) dividend, which must be equal to at least 6% of the capital, is retained and

179

180

181

378

As well as those EPE, which resolve through the Meeting of company members (art. 13 L. 3190/1955) the application of the International Accounting Standards (IAS) to the preparation of their annual accounts (art. 137 par. 1, art. 134 par. 2 L. 2190/1920). From amongst the Chartered Accountants of the Body of Chartered Accountants, provided for by the L. D. 3329/1955, see under II.8. a). See also above under II.8. b).

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– the remaining part of the profits is disposed of in accordance with the provisions of the statutes. Unless the statutes provide otherwise, the company members have a right to the EPE’s 212 net profits, deriving from the annual balance sheet, in proportion to their contributions. If a distribution of unrealized profits has been made in advance, the partners have the obligation to return to the EPE what they received in the course of such distribution, while the respective claims of the EPE are barred five (5) years after such distribution (art. 35 L. 3190/1955). The reserve, provided for by the L. 3190/1955 (art. 24), is a regular (ordinary) one and is 213 set up through the annual deduction of at least one twentieth (1/20) of the EPE’s net profits. This deduction ceases to be mandatory, when the regular reserve has reached an amount equal to one third (1/3) of the company capital. The statutes may, further, provide for the formation of an extraordinary reserve.

8.

Termination of business

a)

Dissolution of the EPE

An EPE is dissolved in every case, provided for by the law or by its statutes (art. 44 par. 1 214 sub. a L. 3190/1955). Reasons for the dissolution of an EPE are: – Expiration of its duration, specified by the statutes.182 – Resolution of the members’ Meeting to this effect, adopted by the qualified majority of three quarters (3/4) of the total number of partners, representing three quarters (3/4) of the total company capital, unless the statutes provide for a higher majority percentage (art. 44 par. 1 sub. b). The law does not require notarization of such resolution, but this is usual in practice.183 – A court decision, declaring the EPE’s dissolution and ordering its liquidation due to a serious ground184 pursuant to a petition185 of one or more partners,

182 183

184

185

A silent extension of the EPE’s duration is not possible. In particular, the partners of the EPE submit to the notary public a (certified) copy of the minutes of the meeting, during which they resolved the company’s dissolution or convene into a meeting before the notary public, who draws up the notarial deed of the company’s dissolution to be signed by the partners or their proxies. With the same notarized resolution the partners appoint the liquidators. Serious grounds, justifying the EPE’s dissolution are e. g. failure to achieve the company’s business object, continuous failure of operation of the Meeting of partners, bad management or violation of the law and the company’s statutes by the managers, loss of one half (1/2) of the EPE’s equity, when the managers fail to convene the Meeting of partners within reasonable time or the latter fails to adopt a resolution (art. 45 par. 2) etc. The petition must be brought to the Multi Member First Instance Court of the district, in which the registered office of the EPE in question is located.

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representing at least one tenth (1/10) of the capital (art. 44 par. 1 sub. c) or of the withdrawing partner186 (art. 43 par. 2). – Declaration of the EPE’s bankruptcy.187 – Loss of one half (1/2) of the company’s equity, in which case the managers are obliged to convene the Meeting of partners, in order to resolve the dissolution of the EPE or the reduction of its capital, but in no case to an amount less than the minimum of EUR 18,000,– (art. 45 par. 1, referring to art. 4 par. 1 L. 3190/1955). The law again does not require notarization of such resolution, but this is usual in practice. – A court decision, declaring the company’s nullity due to one of the reasons,188 provided for exhaustively in art. 7 par. 1 L. 3190/1955, pursuant to an action brought against the EPE by any person, having a lawful interest. In such case the Court appoints with the same decision the liquidators (art. 7 par. 2). 215 An EPE may not be dissolved due to incapacitation, bankruptcy or death of one or more of its partners, unless the articles of association designate these events as reasons for the company’s dissolution (art. 44 par. 2 L. 3190/1955). 216 The dissolution of the EPE as well as the necessary information on the liquidators (concerning their appointment, removal for any reason whatsoever, the way of exercise of their authorities together with their identity particulars) are subject to the publication requirements of art. 8 (art. 44 par. 3, art. 47 par. 5, art. 7 par. 3), i. e. the respective notarial deed or court decision must be registered in the Book of Companies and an announcement about such registration must be published in the Government Gazette on the initiative of every partner or manager. b)

Liquidation of the EPE

217 Once dissolved for any reason, except for the case of declaration of its bankruptcy, the EPE enters the stage of liquidation. During the whole stage of liquidation and until its completion through the publication of the final balance sheet in the Government Gazette and the distribution of the liquidation proceeds to the company members, the

186 187

188

380

See above under III.3. c). The EPE is declared bankrupt by a decision of the Multi Member First Instance Court of the district of its registered office pursuant to a petition of the EPE itself or of any of its creditors (art. 528 Commercial Law, art. 2 pars. 1 and 4 L. 635/1937). With the management and representation of the bankrupt EPE is entrusted a bankruptcy administrator (trustee in bankruptcy), appointed by the competent Court (arts. 549 and 550 Commercial Law). After the completion of the bankruptcy proceedings, the EPE enters the stage of liquidation. These reasons are: a) formation of the EPE in violation of the provisions of art. 4 par. 1 (capital less than EUR 18,000,–), art. 6 par. 1 (no notarization of the statutes) and art. 6 par. 2 subs. b, c, e and f (no designation in the statutes of the EPE’s trade name, business object, capital, in kind contributions), b) the EPE’s business object is illegal or contrary to the public order and c) none of the founders had the legal capacity to contract at the time of signature of the EPE’s formation contract (art. 7 par. 1 L. 3190/1955).

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EPE is deemed to continue operating for the purposes and needs of liquidation, i. e. it retains its legal personality, merchant capacity and its trade name with the addition of the words “under liquidation” (art. 46 par. 1 L. 3190/1955).

The organs of liquidation are mostly the company’s managers, unless the articles of 218 association or the Meeting of partners appoint other person(s) (partners or third persons) as liquidators (art. 47 par. 1 L. 3190/1955). Liquidators, appointed by the company’s statutes, may be removed by a court decision189 due to a serious ground190 pursuant to a resolution of the Meeting of partners to this effect (art. 19 par. 1), while liquidators, appointed by the Meeting of partners, may be removed at any time by it and if a serious ground exists, by the Court upon petition of partners, representing at least one tenth (1/ 10) of the capital (art. 47 pars. 2, 3 and 4 L. 3190/1955). The liquidators have the authority to represent the EPE during the liquidation stage and 219 sign for it by placing their signatures below its trade name (art. 49 par. 1 sec. 1). In carrying out the necessary acts for the liquidation of the EPE’s property, to which their authority is restricted (art. 46 par. 2), they act collectively, unless the statutes provide otherwise (art. 49 par. 1 sec. 2). Furthermore, their authority comprises the winding up without delay of the EPE’s pending affairs, the payment of the company’s debts (satisfaction of the company’s creditors), the collection of claims outstanding and the conversion of the company’s property into cash. For the purpose of settling the company’s pending affairs, the liquidators may even enter into new business (art. 49 par. 2). The most important duties of the liquidators are: – upon commencement of the liquidation, preparation of an inventory of the EPE’s assets and of the respective balance sheet, which must be, further, published in the Government Gazette (Bulletin of AE and EPE) (art. 48 sec. 1 referring to art. 8 par. 3), – preparation of a balance sheet at the end of each fiscal year (art. 48 sec. 2), – upon completion of the liquidation, preparation of the final balance sheet, which must be registered in the Book of Companies and published in the Bulletin of AE and EPE of the Government Gazette (art. 50 sec. 1), – after completion of the liquidation, distribution of the liquidation proceeds to the partners pro rata of their participation portion in the capital (art. 50 sec. 2 L. 3190/1955). The EPE ceases to exist after the completion of the liquidation procedure, which occurs 220 through the publication in the Government Gazette of the final balance sheet and the

189

190

Of the Single Member First Instance Court, according to the procedure of voluntary jurisdiction (arts. 739 ff. Civil Procedure Code). Serious grounds for the removal of the liquidators by the Court are e. g. violation of their duties or their incompetence, enmity between the partners and the liquidators, long retardation of the liquidation procedure, carrying out of acts contrary to or irreconcilable with the purposes of liquidation etc.

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distribution of the liquidation proceeds to the partners.191 If, however, after the completion of the liquidation stage, the existence of an item of the EPE’s assets or an unknown creditor, who has not been satisfied yet, becomes known, the liquidation stage revives and liquidators are appointed anew on the initiative of anyone, having a lawful interest.192 In that case, the (new) liquidators must notify the revival of the liquidation to the Clerk of the competent First Instance Court. For the purpose of satisfaction of such creditor, the EPE has a claim against its partners for the liquidation proceeds, distributed to them, according to the law provisions on unjustified enrichment (arts. 904 ff. C. C.).

9.

Partnership Limited by shares – Eterorrithmi Etairia kata metoches

221 The Greek company form of the Limited Partnership (“Eterorrithmi Etairia”) is distinguished into the “Simple Limited Partnership” and the “Partnership Limited by shares” and is a commercial company with legal personality. A Partnership Limited by shares consists of at least one (or more) “general” partner(s), who are unlimitedly liable for the company’s obligations and debts and of one (or more) “limited” partner(s)-“financiers” of the company (art. 23 Commercial Law). The participation of each limited partner in the company, corresponding to a certain percentage of the capital, which he covers by means of in cash or in kind contribution(s), is incorporated into a share certificate as negotiable security (art. 38 Commercial Law). Such shares are always registered and freely transferable. Limited partners carry, further, no liability193 for the company’s debts and obligations and the partnership is not dissolved due to their death, incapacitation, bankruptcy etc. Due to the “mixed” character194 of the Partnership Limited by shares, this corporate form is regulated by both the law governing the Companies with Limited Liability (art. 50a L. 3190/1955) and the law provisions on the General and Civil law Partnerships (arts. 19-28, 38-39, 4144, 46 Commercial Law, arts. 741-784 C. C.). For many decades it had been abstained from the adoption of this company form in Greece, because it had caused serious bankruptcies.

191

192 193 194

382

In practice, after completion of the liquidation, the liquidators submit to the Clerk of the First Instance Court a certified copy of the notarial deed of the EPE’s dissolution together with the final balance sheet and the Clerk enters these documents in the Book of Companies and marks that the EPE in question ceases to exist. These documents must be, in addition, submitted to the competent Chamber and to the Public Financial Authority. See Athens Court of Appeal 5452/1995, DEE 1996, 53. Once they have paid in full their contributions to the company. The Partnership Limited by shares is a “personal” company concerning its “general” partner(s) and a “capital” one in respect of its “limited” partner(s).

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Greece

222

IV. General aspects of taxation of the Company Limited by shares (AE) and the Company with Limited Liability (EPE) in Greece195 In view of the variety and complexity of the taxation liabilities, imposed on the legal 222 entities by the Greek Tax Law, only an overview of the main taxes, the AE and the EPE are subjected to, will be set out in this chapter.196 In particular, the main taxes, an AE and an EPE must pay, are: – Capital concentration tax. As already mentioned,197 the capital concentration tax (arts. 17-31 L. 1676/1986) is payable mainly upon establishment of the legal entity and upon any capital increase. The tax rate is 1% of the true value of the taxable event (initial capital, capital increase etc.). For the collection of that tax, the company makes a declaration and pays the sum due to the State within fifteen (15) days after the taxable event was effected (in the case of the AE’s formation, within 15 days from the date of registration of the administrative decision in the MAE, in the case of the EPE’s formation, within 15 days after the signature of the company’s formation contract). – Corporate income tax. Both AE and EPE are subject to the corporate income tax (arts. 98-118 L. 2238/1994) at a rate of 35%198 of their total net income or profit, acquired during the last accounting period both in Greece and abroad. Profits for distribution are taken from the residue remaining after the deduction of the corporate income tax, thus the shareholders of the AE /partners of the EPE have no tax obligation for the amounts of dividends they collect. A surcharge of 3% is levied on gross income derived from immovable property, but such surcharge may not exceed the tax calculated on the company’s income. The tax is paid in eight (8) equal monthly instalments. To companies, which settle their corporate income tax liability in full, when they file their tax returns, a discount of 2,5% is granted. Beyond the aforementioned taxes, both corporate forms are subjected to a number of 223 other taxes, such as:

195

196

197 198

See Arnaoutis J./Deligiannis A., Tax obstacles concerning the transfer of non-incorporated businesses from one generation to another: Greece, Hellenic Federation of Independent Professional Tax Consultants (www.cfe-eutax.org /pdf_word_documents /guidelines /pdf/Greece.pdf); European Commission, Directorate-General Taxation & Customs Union, Inventory of taxes in the EU: Greece (www.europa.eu.int /comm/taxation_customs/publications /info_doc /taxation/txinventory/tax_inventory_gr.pdf). Greek Tax Law does not provide for a uniform taxation treatment of all legal entities; thus, various distinctions and tax exemptions apply depending mainly on the form of the legal entity. However, both AE and EPE are subjected to the same, more or less, main taxes and this is the reason, why their taxation treatment is dealt with briefly in one and the same chapter. See above under II.2. a) gg) and III.2. a) cc). According to the legislator’s will (state: end 2004), the corporate income tax rate will be reduced gradually during the following years (in 2005 to 32%), in order to reach finally in year 2007 the amount of 25%.

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383

224

Greece

V. Personal statute and branches of companies

– Value added tax (L. 2859/2000) on the supply of goods and intra-Community acquisition and supply of services as well as the import of goods. Since 1st April 2005 (L. 3336/2005) the standard value added tax rate is 19% (reduced rates: 9%, 4,5%). – Special tax on real estate (art. 15 L. 3091/2002), if the companies have rights of full or bare ownership or usufruct on real estate located in Greece. Such special annual tax amounts to 3% of the value of the right, which is estimated on the basis of the value of the estate on January 1st of the year in consideration. – Real estate transfer tax (L. 1521/1950). – Tax on major real estate (L. 2459/1997). – Stamp duties (L. 4755/1930) for their commercial transactions. – Withheld tax on the remuneration of the members of the AE’s BoD/managers of the EPE etc.

V.

Personal statute and branches of companies199

224 The Greek private international law (art. 10 C. C.) provides that the capacity of a company with legal personality and consequently of an AE and an EPE is regulated by the law of the country, where the “seat” of the concrete legal entity is located. The whole legal status of the company, i. e. its formation, structure and operation, its dissolution and liquidation and in general its “nationality” is, therefore, governed by that law. The seat (registered office) of the company is stated in the company’s statutes (statutory seat). However, both Greek legal doctrine and court practice accept that if there is a discrepancy between the “real” and the “statutory” seat of the company, the “real” seat predominates and is decisive for the determination of the company’s personal statute. 200 “Real” seat is considered to be the place, where the management of the legal entity really operates (arts. 10 and 64 C. C.). Consequently, the characterization of a company as a “domestic” or a “foreign” one depends on whether its “real” seat is located in Greece or abroad. If a foreign company (e. g. AE or EPE) has been established abroad according to the rules of the law of its statutory seat, but its management is really operating in Greece, such company is void for the Greek legal order, since the requirements, imposed by the Greek law for the establishment of the concrete corporate form have not been abided by. In such case, the company is considered to be a “de facto” personal company (General or Limited Partnership etc.),

199

200

384

See Meglidou S., Tina peri egkatastaseos allodapon etairion en Elladi (About the establishment of foreign companies in Greece), Arm. 1971, 204; Tzouganatos D., Eleutheria egkatastasis nomikon prosopon kata ta arthra 52, 58 SinthEOK kai etairiko diethnes dikaio (Freedom of establishment of the legal entities according to the arts. 52, 58 European Treaty and international company law), NoB 1994, 14; Papagiannis I./Kalogeras D., I metafora tis edras nomikou prosopou sto diethnes kai europaiko etairiko dikaio (The transfer of seat of the legal entity in the international and european company law), Arm. 1998, 1458. A departure from the theory of the “real” seat is introduced a. o. by the L. 791/1978 on maritime companies, in respect of which the “statutory” seat predominates.

Vasiliki Vavitsa-Hohenau

1. Branches or agencies of Companies Limited by shares

Greece

225

which has the capacity to be the subject of rights and duties and to appear before a Court as a litigant.201 Branches or agencies, established in Greece by domestic or foreign AE or EPE are 225 considered to be special “occupational” residences (art. 51 sec. 3 C. C., applying analogically to legal persons) of such corporations, which constitute in no case independent legal entities.

1.

Branches or agencies of Companies Limited by shares

A domestic AE may establish one or more branches anywhere in Greece without any 226 formalities, apart from the obligation to declare to the locally competent Public Financial Authority of the district, where the respective branch is opened, the opening of the branch and submit the branch’s Books and particulars to it for the purpose of endorsement. On the contrary, a foreign Company Limited by shares may establish a branch or an 227 agency in Greece only after submitting to the Ministry of Development (Department of Commerce of the Prefecture, in the district of which the respective branch or agency is going to be located) the following documents, duly translated in the Greek language and authenticated (arts. 50 and 50a L. 2190/1920): – a copy of its formation deed and of the articles of association, if they constitute a separate deed, as well as every amendment of these documents, – a copy of the power of attorney of its representative or agent in Greece, duly certified by the competent Greek consular authority, which necessarily includes the appointment of an attorney, authorized to accept the service of documents, the year of the company’s formation and the names of the persons representing the company at its registered office. The establishment of a branch or an agency of a foreign AE in Greece must be 228 registered in the MAE and an announcement concerning such registration must be published in the Bulletin of AE and EPE of the Government Gazette (art. 7b L. 2190/ 1920, art. 3 par. 1 M. D. K3-4114/1986). The law lays down a number of further acts and data, which must be subjected to the publication formalities of art. 7b L. 2190/1920 by the foreign AE in respect of its branch in Greece, while the kind of such acts and data depends on whether the AE is governed by the law of another Member State of the European Union (art. 7a par. 2 L. 2190/1920) or by the law of a third country non member of the European Union (art. 7a par. 3 L. 2190/1920) or it is a foreign credit and financial institution with registered office in another Member State or third State (arts. 50c-50e L. 2190/1920). If a foreign AE establishes more than one branches in Greece, its formation deed and articles of association as well as the accounting docu-

201

Piraeus Court of Appeal 1165/1996, DEE 1997, 281; Arios Pagos 975/1997, DEE 1997, 1083; Piraeus S. M. F. I.C. 543/1998, NoB 1999, 452; Piraeus S. M. F. I.C. 4208/1999, NoB 2000, 82; Arios Pagos 335/2001, DEE 2001, 608; Arios Pagos 2/2003, DEE 2003, 525.

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385

229

Greece

V. Personal statute and branches of companies

ments may be entered into the Register of AE (MAE) of the Prefecture, in the district of which one of the branches is located, at the AE’s discretion (art. 7a par. 5). 229 As far as the operation of the branch or agency of a foreign AE in Greece is concerned, the law imposes on the branch or agency the obligation to state in its letters and order documents, in addition to the information of art. 7c, the Register, wherein the file of the branch is kept together with its registration number (art. 50b) and on the foreign AE the obligation to submit to the Ministry of Development within three (3) months after the day of its approval by the GM a copy of its annual balance sheet accompanied by a report on the company’s operation in Greece during the respective fiscal year (art. 50 par. 2 L. 2190/1920).

2.

Branches or agencies of Companies with Limited Liability

230 If a domestic Company with Limited Liability (EPE) establishes a branch within the jurisdiction of another First Instance Court outside the district of its registered office, a copy of its statutes must be deposited with the Clerk of this First Instance Court on the initiative of every partner or manager within one (1) month from the adoption of the resolution of the members’ Meeting on the establishment of the branch. The Clerk registers the statutes in the Book of Companies with the discernible indication “Branch” (art. 8 par. 6 L. 3190/1955). 231 Foreign Companies with Limited Liability may establish a branch or an agency in Greece only upon a decision of the Minister of Development (art. 57 L. 3190/1955) to be issued under the following conditions (art. 58 par. 1): – the foreign EPE has been established in accordance with the legislation of the State, where its registered office is located and is in operation, – the company has submitted to the Ministry of Development a copy of the power of attorney of its representative or agent in Greece, duly certified by the competent Greek consular authority, which necessarily includes the appointment of an attorney, authorized to accept the service of documents and states the name and surname of the persons representing the company at its registered office as well as the company’s trade name and – Greek companies may establish a branch or an agency in the State, where the registered office of the foreign company is located (principle of reciprocity). 232 The administrative decision must be registered in the Book of Companies of the First Instance Court of the district, where the branch or agency of the foreign EPE is located and be published in the Bulletin of AE and EPE of the Government Gazette (art. 8 L. 3190/1955). Until the completion of the aforementioned formalities, the persons, who have contracted in the name of the company in Greece, are fully and without limit liable (art. 59 L. 3190/1955).

386

Vasiliki Vavitsa-Hohenau

Ireland Paula Phelan

Table of Contents I.

Introduction

The system of commercial business forms in Ireland a) Sole Proprietorship b) Partnerships c) Branch

393

1.

393 393 393 393

II. The Stock Corporation –

Public Limited Company (Plc) 1. Character of the Plc 2. Formation of a Plc a) Formation procedure aa) Execution of the formation documents b) Registration procedure/ commercial registers c) Approval requirements d) Shelf companies e) Cost/Duration f) Requested Information on Business Letters 3. The Shareholder/the Shareholder Meeting a) Rights and Duties of a Shareholder aa) Voting bb) Dividends cc) Capital dd) General Meetings (1) Annual general meeting (2) Extraordinary general meeting (3) Notice and conduct of general meetings ee) Protection of Minority Shareholders ff) Shareholder’s Duties

Paula Phelan

394 394 395 395 395 395 395 396 396 396 397 397 397 397 398 398 398 398 398 399 400

b) Shareholder Meetings/ Shareholder Resolutions aa) Ordinary Resolution bb) Special Resolution cc) Some special percentages 4. PLC Share a) Classes of shares. aa) Ordinary Shares bb) Preference Shares cc) Convertible Shares dd) Redeemable Shares ee) Deferred and non-voting shares b) Transfer of Shares/ Legal Requirements/Cost c) Own Shares 5. Memorandum and the Articles of Association a) Mandatory Content of memorandum of association aa) Name of the Corporation and its Registered Office bb) Business Object cc) Amount of Share Capital and its Dissection, Types of Share Certificates dd) Information Concerning the Management Board ee) Information Concerning Public Notices b) Additional Provisions of the Articles of Association c) Amendment of the Articles of Association aa) Formally Recorded Shareholder Resolutions bb) Registration with the Commercial Register

400 400 401 401 402 402 402 402 403 403 403 403 404 405 405 405 405

405 405 406 406 406 406 406

387

Ireland d) 6. a) b) c)

d) 7. 8. a) b) c) 9. a) b) c) 10. a) b) c) d) e) 11. a) b) c) d) 12. a) b) c)

Capital Increase/Decrease Board of Directors Constitution of the Board of Directors Management and Representation Responsibilities and Personal Liability of Members of the Board of Directors aa) To the company bb) To third parties cc) Indemnity dd) Compliance Statements ee) Related Statement Other Representatives of a Plc Committees Selected Capitalisation and Liability Questions Concerning the Plc Prohibition of Repayment of Shareholders Contributions Restrictions for the Repayment of Capital-Substituting Loans Liability Risks for the Management Board in the Event of Insolvency Record Keeping/Accounting Record Keeping and Annual Financial Statements Audit Requirements Disclosure Taxation Corporation Tax Accounting Periods for corporate tax Allowable expenses and special reliefs Offsetting of losses against future liabilities Capital gains and losses Dissolution of a Corporation/ Termination of the Business Winding Up Receivership Examinership The European Insolvency Regulation Limited Partnership with Share Capital Formation/Constitution Change of General Partners and Limited Shareholders Taxation, Record Keeping/Accounting

Table of Contents 407 407 408 408

III. Limited Liability Company 1. 2. a)

408 408 408 409 409 409 410 410

c) d) e) f)

411

3.

411

a)

b)

411 412 413 413 414 414 415 415 416 416 416 416

b)

4. a)

416 416 417 417 417 417 418 418 418

b) c)

388

418

Character of the Private Limited Company (“Ltd”). Formation of a Ltd Formation procedure aa) Execution of the formation documents Registration procedure/ commercial registers Approval requirements Shelf companies Cost/Duration Requested Information on Business Letters The Shareholder/the Shareholder Meeting Rights and Duties of a Shareholder aa) Voting bb) Dividends cc) Capital dd) General Meetings (1) Annual general meeting (2) Notice and conduct of general meetings ee) Protection of Minority Shareholders ff) Shareholder’s Duties Shareholder Meetings/Shareholder Resolutions aa) Ordinary Resolution bb) Special Resolution cc) Some special percentages Ltd Share Classes of shares. aa) Ordinary Shares bb) Preference Shares cc) Convertible Shares dd) Redeemable Shares ee) Deferred and non-voting shares ff) Treasury shares gg) Bonus shares hh) Employee shares Transfer of Shares/Legal Requirements/Cost Own Shares

418 419 419 419 420 420 420 420 421 421 421 421 422 422 423 423 424 424 425 426 426 426 427 428 428 428 428 428 429 429 429 429 429 429 430

Paula Phelan

Index 5. a)

b) c)

d) 6. a) b) c)

d)

The Memorandum and Articles of Association Mandatory Content aa) Name of the Corporation and its Registered Office bb) Business Object cc) Amount of Share Capital and its Dissection, Types of Share Certificates dd) Information Concerning the Management Board ee) Information Concerning Public Notices Additional Provisions of the Articles of Association Amendment of the Articles of Association aa) Formally Recorded Shareholder Resolutions bb) Registration with the Commercial Register Capital Increase/Decrease Board of Directors Managing Directors Management and Representation Responsibilities and Personal Liability of Directors aa) To the company bb) To third parties cc) Indemnity dd) Compliance Statements ee) Related Statement Other Representatives of Ltd

Ireland

431 431 431 432

432 432 433 433 434 434 434 435 435 436 436 436 436 437 437 438 438 438

7. Committee a) Mandatory/Optional Committee b) Composition and Responsibilities of the Committee c) Qualifications d) Consultative/Advisory Council 8. Selected Capitalisation and Liability Questions Concerning the Ltd a) Reduction in Share Capital b) Capital-Substituting Loans c) Obligation to Petition for Insolvency Proceedings 9. Accounting a) Book Keeping and Annual Financial Statements (Publication Obligations) b) Audit Requirements c) Disclosure 10. Taxation a) Corporation Tax b) Accounting Periods for corporate tax c) Allowable expenses and special reliefs d) Offsetting of losses against future liabilities e) Capital gains and losses 11. Dissolution of a Corporation/ Termination of the Business a) Winding Up b) Receivership c) Examinership d) The European Insolvency Regulation

439 439 440 440 440 440 440 441 442 442 442 443 443 444 444 445 445 445 445 445 445 446 446 446

Index Ad Valorem Duty 62, 205 Accounting 52, 95, 99, 107, 127, 191, 254, 263, 285, 287, 299 Book Keeping and Annual Financial Statements (Public Obligations) 280-383 Agents of the Company 89, 249 Implied Warranty of Authority 89, 249 Aggregate Loans 104 Alteration in Objects Clause 51, 190

Paula Phelan

Alteration of Capital 288 Annual Accounts 99, 111, 286 Annual Audited Accounts 30, 165 Annual Returns 91, 98, 111, 227, 251 Articles of Association 7, 8, 11, 21, 25, 26, 29, 33, 36, 37, 38, 45, 51, 53, 57, 59, 61, 65, 73, 74, 75, 77, 80, 86, 93, 106, 132, 145, 146, 149, 151, 152, 158, 162, 163, 164, 166, 171, 175, 176, 177, 184, 190, 193, 197, 199, 204, 208, 209, 212,

389

Ireland 213, 216, 219, 226, 227, 229, 231, 233, 234, 242, 243, 246, 258, 259, 273, 304 Audit Exempt Company 285 Auditors 33, 36, 37, 49, 110, 111, 112, 113, 114, 171, 175, 176 Appointment and Removal of Auditors 49, 188 Audit Committee 99, 263, 264, 267, 269 Reappointment of a Retiring Auditor 33, 171 Remuneration of the Auditors 33, 171 Auditors’ Reports 33, 114, 171 Audit Requirements 110, 284 Balance Sheet 33, 36, 95, 109, 114, 171, 175, 254, 265, 283 Bankruptcy 39, 211 Bodies Corporate acting by Representatives at Meetings 228 Branch Disclosures 4 Business Forms 1, 6 Business Name 2, 3 Cancellation of Unissued Capital 49, 80, 188, 234 Capital Duty 19, 73, 141, 156, 226 Capital Increase/Decrease 80, 234 Capital Requirement 10, 14 Capital 8, 9, 10, 13, 14, 19, 25, 27, 28, 30, 31, 35, 43, 49, 51, 52, 54, 55, 57, 58, 59, 64, 65, 67, 68, 71, 72, 73, 74, 80, 100, 101, 104, 117, 126, 128, 136, 138, 140, 141, 146, 147, 148, 150, 151, 152, 156, 161, 163, 165, 168, 169, 174, 182, 188, 190, 191, 194, 195, 197, 198, 199, 202, 213, 215, 216, 222, 223, 225, 226, 228, 234, 235, 272, 273, 274, 275, 289, 298, 300, 308 Cancellation of Paid-Up Share Capital 80, 100, 169, 274 Capital-Substituting Loans 101, 275 Reduction of Issued Capital 51, 80, 190, 234 Certificate of Trade 14 Change of General Partners and Limited Shareholders 140 Change of Name 51, 77, 190, 231 Charitable or Public Purposes 162, 219 Classes of Shares 31, 51, 53, 168, 190, 193 Deferred 31, 60, 168, 200 Ordinary 31, 54, 55, 58, 168, 194, 195, 198

390

Index Preference 55, 56, 57, 58, 64, 168, 195, 196, 197, 198, 213 Commercial Registers 16, 153 Committee 99, 242, 259, 260, 261, 262, 263, 264, 266, 267, 268, 269, 270 Nomination Committee 262 Remuneration Committee 261 Companies Registration Office (CRO) 13, 16, 20, 22, 78, 79, 114, 153, 159, 193, 217, 233, 249, 285 Compliance Statements 95, 99, 254 Compliance Policy Statement 95, 254 Related Statement 97, 113, 256 Consultative/Advisory Council 271 Contract of Employment 85 Corporation Tax –Manufacturing Relief 121, 294 Creditors 45, 54, 91, 130, 136, 169, 184, 194, 251, 279, 302, 308 Creditors’ Fund 45, 184 CREST 63 Cross Border Insolvency Proceedings 137, 309 Date of Incorporation 33, 171 Debenture Holder 36, 133, 175, 305 Debts 46, 57, 129, 139, 185, 197, 251, 252, 301 Declaration of Compliance 13, 72, 150, 225 Director of Corporate Enforcement 43, 44, 112, 133, 183, 305 Offences in relation to the Destruction of Documents 44, 183 Powers of Examination 44 Search Warrants 44, 183 Directors Board of Directors 38, 81, 84, 86, 96, 99, 174, 227, 236, 246, 255, 259. 264, 266, 269 Bond 81, 82, 236, 237 Breach of Trust 88, 106, 248, 253 Certificate from the Registrar of Companies (Economic Activities) 81, 236 Directors’ Report 33, 95, 97, 99, 114, 171, 254, 256, 264, 283 Disqualification of Directors 228 Election and Removal of Directors 49, 188 Fraud 40, 90, 91, 179, 250, 251, 252 Indemnity 93, 106, 210, 228, 253 Irish Resident Director 72, 82, 84, 237 Irregular Allotment 91, 251

Paula Phelan

Index Liability to Account 88, 248 Managing Directors 228, 243 Negligence 88, 93, 106, 248, 253 Powers 42, 49, 181, 188, 212, 216, 228, 242, 244, 245, 259, 160 Reckless Trading 91, 251, 252 Remuneration of Directors 242, 243, 261 Restricted Director 148, 283 Rotation of Directors 228, 243 Statutory Duties 33, 171 Tort 90, 250 Untrue or Wilful Non-Disclosure in a Prospectus 91 Wilful Default or Actual Dishonesty 93, 253 Directorships 83, 239 Directors’ Report 33, 95, 97, 99, 114, 171, 254, 256, 264, 283 Disclosure 4, 114, 286, 287 Dissolution of a Corporation 129, 301 Creditors’ Voluntary Winding Up 279 Voluntary Winding up 130, 131, 132, 279, 302, 303, 304 Winding Up by the Court 130, 302 Distributable Profits 56, 166, 196, 213 Distribution of Assets 54, 194 Dividend 23, 29, 30, 33, 46, 49, 54, 55, 56, 60, 102, 109, 162, 164, 165, 166, 167, 171, 185, 188, 194, 195, 196, 200, 201, 202, 216, 219, 228, 276, 277 Declaration of a Dividend 33, 171 Interim Dividend 29, 49, 164, 188 Preferential Dividend 56, 196 Electronic Company Formation Scheme 20, 157 Employee Share Scheme 102, 276 Examinership 136, 308 External Company 5 Filing Fees 19, 156 Financial Assistance 51, 52, 102, 103, 190, 191, 214, 272, 276, 277 Financial Statements 95, 104, 107, 113, 254, 280 Financial Year End 29, 164 Formation Procedure 11, 149 10 Day Company Formation F Phrainn scheme 20, 21, 157, 158

Paula Phelan

Ireland Formation Report 15 Formation Audit 15 General Meetings 26, 32, 36, 38, 49, 163, 170, 175, 177, 188, 216, 228 Annual General Meetings 49, 188 Approval of Accounts at Annual General Meetings 49, 188 Casting Vote 38, 48, 50, 177, 187 Extraordinary General Meetings 32, 35, 170, 174 Notice and Conduct 36, 175 Ordinary Business 34, 172 Quorum 38, 51, 177, 190 Special Business 24, 172 Group Accounts 99, 283 Increase in Authorised Capital 49, 188 Interim or Initial Accounts 30, 165 Internal Audit 99 Insolvency 104, 131, 135, 137, 278, 303, 307, 309 Investment Company 10, 68, 148, 161, 223 Irish Nationality 23, 160 Irish Stock Exchange 63 Issue of Shares at a Discount 51, 190 Licence from the Minister for Enterprise, Trade and Employment 23, 160 Limitation of Liability 24, 140, 144 Limited Partnership 138, 139, 141, 142, 143 Limited Partnership with Share Capital 138 Liquidator 51, 129, 135, 137, 190, 227, 301, 307, 309 Loans 101, 102, 104, 275, 276, 286 Management Autonomy 4 Management Board 72, 104, 225 Management Powers 86, 246 Memorandum of Association 67, 70, 71, 73, 151, 152, 215, 221, 222, 226 Mandatory Content of Memorandum of Association 67 Business Object 70, 221 Net Assets 30, 103, 104, 277 Nominal Values 31, 168 Ordinary Resolution 48, 49, 52, 65, 80, 187, 188, 191, 234 Pari Passu 45, 184 Parent Company 99

391

Ireland Partnerships 3, 139, 143 Poll 26, 27, 163 Preferential Rights 55, 195 Private Company 8, 11, 51, 52, 95, 146, 148, 190, 191, 223, 254, 265, 273 Limited by Guarantee and having a Share Capital 9, 147, 151 Limited by Shares 6, 9, 14, 67, 71, 144, 147, 265, 273 Unlimited having a Share Capital Single Member Private Limited Companies 148, 223 Private Company Reregistering as a Plc 51, 190 Proxy 28, 163 Public Limited Company (Plc) 6, 7, 9, 11, 15, 30, 31, 32, 63,67, 68, 71, 74, 81, 83, 84, 85, 98, 99, 100, 102, 103, 110, 114, 190, 191, 238, 276, 277 Limited by guarantee and having a Share Capital 9, 147, 151 Limited by guarantee without Share Capital 67, 74 Limited by Shares 6,9, 14, 67, 74, 144, 147, 265, 273 With a Variable Share Capital 9 Public Notices 73, 226 Public Unlimited Company not having a Share Capital 9 Receivership 133, 305 Debenture Document 134, 306 Recognised Activity 18, 155 Record Keeping 107 Accounting Records 107 Balance Sheet 33, 36, 95, 109, 114, 171, 175, 254, 265, 283 Profit and Loss Account 33, 36, 99, 109, 114, 171, 175, 283 Register of Members 62, 207, 210 Registered Office of the Company 12, 150, 225 Registrar of Companies 2, 4, 5, 11, 14, 73, 77, 78, 81,82, 83, 139, 149, 153, 217, 226, 227, 231, 232, 236, 237, 258 Registration with the Commercial Register 78, 232 Repayment of Capital-Substituting Loans 101

392

Index Requested Information on Business Letters 23, 160 Requirements of the Companies Acts in relation to Formation 13, 72, 150, 225 Revenue Law 1, 3 Rights and Duties of a Shareholder 25, 163 The Seal 228 Secretary of the Company 62, 207 Share Capital 8, 9, 13, 25, 27, 28, 30, 31, 49, 51, 52, 54, 59, 64, 65, 67, 68, 71, 73, 74, 90, 100, 104, 138, 147, 150, 151, 152, 161, 163, 168, 169, 188, 190, 191, 194, 199, 213, 222, 225, 228, 234, 272, 273, 274 Share Certificate 71, 234 Shareholders 31, 32, 36, 39, 40, 41, 42, 46, 47, 51, 55, 57, 75, 99, 100,102, 140, 168, 169, 170, 173, 175, 178, 179, 180, 181, 185, 186, 190, 195,197, 208, 212, 224, 228, 276, 283 Derivative Action 41, 190 Fraud on the Minority 40, 179 Majority 40, 47, 48, 50, 52, 53, 73, 179, 186, 187, 189, 234 Protection of Minority Shareholders 38, 39, 178 Oppressive Manner 42, 181 Personal Liability for Company Debts 46, 185 Representative Action 41, 180 Shareholders’ Resolutions 75, 229 Shares 6, 8, 9, 10, 14, 15, 26, 31, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 63, 64, 65, 66, 67, 74, 90, 92, 94, 101, 102, 144, 146, 147, 148, 163, 168, 169, 190, 191, 193, 194, 195, 196, 197, 198, 199, 200, 201, 202, 203, 204, 205, 206, 208, 209, 211, 212, 213, 214, 216, 223, 224, 228, 234, 235, 253, 265, 272, 273, 275, 276 Allotment of Shares 102, 276 Bonus Shares 202 Calls on Shares 225 Company Acquiring own Shares 94 Compulsory Acquisition 52, 191 Conversion of Shares into Stock 228 Employee Shares 203 Forfeiture of Shares 228 Market Value of the Share 62, 206 Non-Redeemable Shares 65, 213

Paula Phelan

1. The system of commercial business forms in Ireland Redemption of Shares 51, 64, 80, 190, 202, 234 Transfer of Shares 61, 204, 208, 228 Treasury Shares 201 Variations in Rights on Shares 51, 190 Shelf Companies 18, 155 Sole Proprietorship 1, 3 Sole Trader 2 Stamp Duty 206 Statement of Capital 13, 72, 150, 225 Statutory Declaration 14, 83, 162, 210, 219 Taxation 116, 117, 142, 288, 289 Accounting Periods for Corp. Tax 125, 297 Allowable Expense and Special Reliefs 126, 295

Ireland

1

Capital Gains and Losses 128, 300 Capital Gains Tax 117, 128, 289, 300 Corporation Tax 117, 118, 121, 122, 123, 128, 289., 290, 293, 294, 295, 305 Double Tax Treaty 116, 288 Future Liabilities 127, 299 Income Tax 117, 142, 289 Tax Legislation 95, 254, 282 Vote 25, 26, 27, 28, 36, 37, 38, 47, 48, 49, 50, 52, 54, 75, 163, 175, 176, 177, 187, 188, 189, 191, 194, 228, 229 Voting on a Show of Hands 26, 163 Ultra Vires 40, 179 Winding Up of the Company – See Dissolution of a Corporation

I.

Introduction

1.

The system of commercial business forms in Ireland

a)

Sole Proprietorship

There is no strict formality in respect of a person who is engaged as a sole or single 1 trader. There are however obligations under revenue laws. The registration of Business Names Act 1963 provides where a sole trader carries on 2 business in Ireland under a business name which does not consist of his true surname then he must furnish the Registrar of Companies specific details identifying his business and name. b)

Partnerships

The requirements are very similar to those outlined above (sole proprietorship) espe- 3 cially in relation to revenue law and registration of Business Names Act 1963. c)

Branch

In accordance with the Companies Act 1963, Irish law requires that a company estab- 4 lishing a place of business must register it with the Registrar of Companies. In accordance with the European Communities (Branch Disclosures) Regulations 1993, Irish law requires the registration of a branch (similar to an established place of business, but with management autonomy) with the Registrar of Companies.

Paula Phelan

393

5

Ireland

II. The Stock Corporation – Public Limited Company (PLC)

5 Specific forms must be delivered to the Registrar of Companies within one month of the external company establishing a branch or a place of business in Ireland. Any alterations in the facts given must also be notified by a branch within 14 days after the date of alteration or 14 days after the date on which notice thereof could, in due course of post and if dispatched with due diligence, have been received in Ireland. The period is 21 days in the case of an established place of business.

II. The Stock Corporation – Public Limited Company (PLC) 1.

Character of the Plc

6 The Plc is a company limited by shares under the Companies Acts 1963 to 2005. 7 A major difference between a private limited company and a Plc is that membership is largely comprised of the investing public in a Plc. The company’s internal affairs are governed by its articles of association. Part I of Table A of the First Schedule to the Companies Act 1963 sets out the model articles of association for a Plc. 8 Section 33 of the Companies Act 1963 defines a private company as a company which has a share capital and which by its articles of association: – restricts the right to transfer its shares: and – limits the number of member to 50, not including persons who are in the employment of the company and persons who, having been formerly in the employment of the company, were, while in that employment, and have continued after the determination of that employment to be members of the company; and – prohibits any invitation to the public to subscribe for any shares or debentures of the company. 9 There exist a number of different types of public company. For example: – the public limited company limited by shares; – the public limited company limited by guarantee and having a share capital; – the public limited company with a variable share capital; – the public limited company by guarantee that does not have a share capital; – the unlimited company having a share capital; and – the public unlimited company not having a share capital. 10 The minimum capital requirement for a public limited company is J 38,092 issued capital. Shares must have a par value, save in the case of an investment company with a variable capital. This is increased to J 126,974 where a public company has a restricted director.

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2. Formation of a PLC

2.

Formation of a PLC

a)

Formation procedure

aa)

Execution of the formation documents

Ireland

11

A Plc can be formed in the same manner as a private company. The documents must be 11 filed with the Registrar of Companies specifically the memorandum and articles of association and form A1. The form A1 contains the following information: – statement of directors and secretary; – statement of intended situation of the registered office of the company; – statement of the intended place where the central administration of the company will normally be carried on; – statement of the intended place or places in the State where it is proposed to carry on an activity.

12

Declaration of compliance is required noting that the requirements of the Companies 13 Acts relating to the formation have been complied with, specifically: – identification of the intended activities by reference to NACE codes (a full list can be obtained from the Companies Registration Office) and place in Ireland of intended economic activity of the company; – in the case of companies having a share capital, a statement of capital. For public limited companies (limited by shares), a statutory declaration indicating the 14 minimum capital requirements have been satisfied is also necessary before the Registrar of Companies issues a special certificate permitting the company to do business and exercise any borrowing powers. This certificate is known as a certificate to trade. Private companies duly incorporated within Ireland may also be converted to a Plc 15 subject to: (a) Original shareholder contributions payments and their payment prior to registration; (b) Payment of shares in a public company requires 25% of the nominal value of each share, plus the whole of any premium, must be paid up on issues; (c) Preparation of a formation report or formation audit b)

Registration procedure/commercial registers

There is one single unified registry for companies – the Companies Registration Office. 16 c)

Approval requirements

All documentation must conform to statute and forms orders.

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d)

Shelf companies

II. The Stock Corporation – Public Limited Company (PLC)

18 Shelf companies are no longer permitted by reason of the new requirement that, on formation, all companies must carry on an activity but this requirement can be mitigated, however, by incorporating a company temporarily engaged in a recognised activity. e)

Cost/Duration

19 The cost of full incorporation, to include costs for registration and filing fees are J 60 plus 0.5% capital duty on issued capital, subject to a minimum of J 1. All other nonstatutory fees (e. g. lawyers’ fees) are variable. 20 Assuming that all documentation is in order, the process takes around 15 days. There are however two methods to expedite incorporation: (i) the “10 day company formation” (known as the f phrainn scheme); and (ii) the electronic company formation scheme (known as the CRO Disk) which can take 5 days. 21 The 10 day scheme is limited to those companies which are immediately required for trading purposes, with the company using a standard form memorandum and articles of association. 22 To avail of the CRO Disk, the firm delivering the papers needs to be a member of the f phrainn scheme. f)

Requested Information on Business Letters

23 The full name of the company, its place of registration and the number with which it is registered must appear. The forename(s) or initial(s) and surname of each director must be included. If a director is not of Irish nationality, the director’s nationality must be stated. It is possible to obtain a licence from the Minster for Enterprise, Trade and Employment to dispense with the requirement to include the directors’ names; in that case, no names of directors need (or may) be printed on the letter-heading. 24 Limited liability status must be stated (section 4 of the Companies (Amendment) Act 1983).

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3. The Shareholder/the Shareholder Meeting

3.

The Shareholder /the Shareholder Meeting

a)

Rights and Duties of a Shareholder

Ireland

25

aa) Voting

A company’s share capital may be divided into several classes of share to which the 25 right to vote may apply either in a restricted or non restricted form. The articles of association govern the right to vote at meetings as well as establishing the voting rights to be attached to each class of share. – Voting on a show of hands Questions which arise at general meetings are decided initially by a show of hands, 26 unless otherwise provided for in the articles of association or where a poll is called. Each member in attendance at the meeting and holding an entitlement to vote has one vote, irrespective of the number of shares held. – Voting on a poll Members may demand a poll, except in the situation where the chairman is being 27 elected or when voting for adjournments. Refusal of a poll is not permitted when at least five members or the holders of at least 10% of the issued share capital who have a right to attend and vote at the meeting have requested that a poll occur. When a poll is called, it is one share one vote, save where the articles otherwise provide. Table A provides that a poll must take place if sought by (i) the chairman (ii) 3 members present (iii) a holder or holders of 10 % of the share capital of the company. – Proxies A proxy may be appointed by a member of the company having a share capital who is 28 entitled to attend and vote at meetings to attend and vote in his place. Such a proxy need not be a member of the company and will have the same right as the member to speak at the meeting and vote. bb) Dividends

A dividend is a distribution of the profits of a company made to its members. Every 29 company has this implied power which does not become payable until the dividend is declared. Usually the practice is to provide in the articles of association that the members in general meeting declare the dividend, however it is not to exceed the amount recommended by the directors. Directors can, under the articles of association pay an interim dividend prior to ascertaining the full results of the company’s business for the financial year end. Dividends are payable only out of the profits available for that purpose. A Plc may make 30 a distribution only if at the time of doing so, the amount of net assets is no less than the aggregated amount of its called-up share capital and its undistributable reserves and if, and to the extent that, the distribution does not reduce the amount of those assets to an amount less than the aggregate. Although interim or initial accounts may be referred to, it is the most recent annual audited accounts that are referred to when determining whether or not a company may declare a dividend. Paula Phelan

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cc)

Capital

II. The Stock Corporation – Public Limited Company (PLC)

31 A company’s share capital can be divided into several classes of shares that may have differing nominal values and grant different rights to the holders. Different classes are usually given distinctive descriptions such as “ordinary”, “preference” or “deferred”. Ordinary shares usually describe that class of shares which confers on their holders the right to receive all profits which the company resolves to distribute as well as to receive the balance of any surplus accessible to shareholders on liquidation after payment of amounts due to preference shareholders in that event. dd) General Meetings (1)

Annual general meeting

32 The two types of general meetings of company’s shareholders are the annual general meeting (AGM) and the extraordinary general meeting (EGM). 33 The AGM must be held by a company once in each calendar year and must not be held more than 15 months after the previous one. The first AGM for a company may be held however any time within 18 months after the date of incorporation. The purpose of an AGM is to provide a forum whereby the directors can comply with their statutory duties. The minimum statutory requirement is the placing before the meeting of a balance sheet, profit and loss account, auditors’ reports and directors’ report on the state of the company’s affairs. In addition to this, the articles of association can provide that the following issues are also dealt with: (i) the declaration of a dividend; (ii) the election of directors in the presence of those retiring; (iii) the reappointment of a retiring auditor; and (iv) the fixing of the remuneration of the auditors. 34 The above would be classified as the “ordinary” business of the meeting. Other business dealt with at the meeting is known as “special” business and the notice of the meeting will refer to what matters will be dealt with. (2)

Extraordinary general meeting

35 The EGM refers to any meeting other than the AGM and is usually convened by the directors of the company. Directors may call an EGM whenever they deem fit but subject to the giving of proper notice. However, it may also be requisitioned by members holding not less than one tenth of the paid up capital of the company carrying voting rights if the objects of the meeting are signed by the requisitionists and deposited at the company’s registered office. Failure by the directors to convene a meeting within 21 days from the date on which the requisition is deposited means that the requisitionists can convene a meeting themselves within 3 months from the date of deposit of the requisition. (3)

Notice and conduct of general meetings

36 The only persons who must be notified of a general meeting are those entitled to attend, i. e. the members and the auditors, unless the articles of association provide otherwise. The articles of association provide for the method of service and the notice must be in 398

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writing. It will state the date, time and place of the meeting, and contain enough specifics of the business to be conducted to enable the shareholders to decide how they will vote. In the case of an AGM, a copy of the balance sheet, profit and loss account, auditor’s report and director’s report must be sent to every debenture holder at least 21 days before the meeting. In the case of an AGM, the minimum length of notice is 21 days and not less than 37 14 days in the case of other meetings of the company. Again the articles of association may provide for different notice periods. For a special resolution, 21 days notice must be given and meetings to be called at shorter notice may be called if the company’s auditors and members entitled to attend and vote all agree. The proceedings for general meetings are normally regulated by the articles of associa- 38 tion. The articles may also provide for a quorum, if not, then three members personally present will amount to a quorum. A meeting will not be valid unless a quorum is present. It is usual under the articles of association for the chairman of the board of directors to act as chair. Generally the chairman of the meetings will have a second or casting vote in the occurrence of a tie. ee)

Protection of Minority Shareholders

Both under common law and by statute, the law seeks to protect the minority’s right in 39 a company. At common law, the basic principle is that only the company can maintain proceedings 40 in respect of wrongs done to it and the shareholders do not have a right of action in such situations whether it was in their own name or that of the company. There are four main exceptions to this principle: (i) where the alleged wrong is illegal or ultra vires to the company (i. e. outside its objects); (ii) where the alleged wrong is actioned by the requisite special resolution passed by a majority of three-fourths of the members; (iii) the alleged wrong is a fraud on the minority of the company which has been committed by the majority; (iv) the alleged wrong infringes the individual rights of the plaintiff member. The remedy available to the minority shareholder is by way of “derivative” action, 41 whereby it derives from the injury to the company as opposed to the individual shareholder or “representative” action where it is brought on behalf of a number of shareholders. The statutory position of the minority shareholders was at one time a petition for the 42 winding up of the company. Where it would be “just and equitable” to do so which would include a situation where the minority of members were being treated unfairly. Under the Companies Acts 1963, an application could be made to the court by a member of the company who complains that its affairs were being conducted in an oppressive manner either in relation to him or other members which disregarded their interests as members. This could also include director’s powers being exercised in a Paula Phelan

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II. The Stock Corporation – Public Limited Company (PLC)

manner that an application to the court to remedy a particular state of affairs would be appropriate. The court could then make a number of orders aimed at resolving the state of affairs complained of. 43 Additionally, the members of a company may apply to the High Court (or the Director of Corporate Enforcement see below) in order to appoint an inspector to carry out an investigation of the company. Such an application would need to be brought by the members holding not less than one-tenth of the paid up capital of the company. Security for costs may be requested by the court. 44 Under the Company Law Enforcement Act, 2001, the power to investigate the affairs of companies was handed to the Director of Corporate Enforcement. The increased powers available under the Act included powers of examination and production of the books and records of the company, an increase in the grounds available for search warrants, the introduction of new offences in relation to the destruction of documentation, as well as increasing the number of persons to whom information which arises in the course of investigation can be revealed to. ff)

Shareholder’s Duties

45 The principal duty of a shareholder is to pay whatever remains unpaid in relation to a share. The amount is payable once a call is made by the company or where terms of an agreement call for instalment payments. If a company is being wound up, a shareholder’s liability for past and future calls will continue, and forms part of the creditors’ fund. The duty in regards to calls is contractual. Once a call is made, it becomes a debt and is actionable by the company against the shareholder for 12 years. Liability for future calls is transferred to any shareholder who takes by transfer or transmission. Usually the articles of association contain the rules for the making of a call, and calls should be made pari passu unless the articles state otherwise. 46 Other duties which apply to shareholders would be the duty to account to the company for dividends received in contravention of the rules available on profits, as well as personal liability for company debts. b)

Shareholder Meetings/Shareholder Resolutions

47 The Irish Companies Acts specify that certain things may occur only where a particular majority of shareholders has voted in favour. aa)

Ordinary Resolution

48 This is a resolution which has been passed by simple majority at a quorate meeting. It is sometimes incorrectly described as a resolution passed by 51% majority. It is correct to state that it is a resolution passed where more than 50 % of the votes cast were in favour. If the vote is 50:50 and the chairman casts his casting vote (where the chairman has such casting vote), then that suffices to pass an ordinary resolution. 49 The principal matters that are dealt with by ordinary resolution are: – increase in authorised capital; 400

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– – – – – – –

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cancellation of unissued capital; authorisation of directors to issue share capital; receipt and approval of accounts at annual general meetings; declaration of dividend (the directors can typically vote interim dividends); election and removal of directors (the directors typically have parallel powers); appointment and removal of auditors (the directors can make appointments); winding up of the company where it is insolvent.

bb) Special Resolution

This is a resolution which has been passed by not less than a 75% majority at a quorate 50 meeting. Once 75% of the votes are in favour, the resolution will be passed. There is no place for a chairman’s casting vote on a special resolution. The principal matters that are dealt with by special resolution are: – amendments of articles of association; – alteration in objects clause; – change of name; – provision of financial assistance to a purchaser of or subscriber for shares in a company: note that a Plc or a subsidiary of a Plc may not provide such assistance to a purchaser of or subscriber for the Plc’s shares; – issue of shares at a discount: note, this can only be done with the approval of the court; – certain redemptions of shares – reduction of issued capital: note, in a limited company this can only be done with the approval of the court; – variations in rights on shares: note that where there are separate classes of shares there must be separate special resolutions passed within the various classes of shares, and the quorum for these class resolutions is 331 / 3 % of the shareholders of each class; – approval of assignment of office by directors; – winding up of the company while solvent; – approval of certain actions and transactions by liquidator of company being wound up; – authorisation of directors to issue share capital other than pro rata to existing shareholders; – private company reregistering as Plc; – plc reregistering as private limited company ; – unlimited company reregistering as limited company, private or public – conversion of shares from non-redeemable to redeemable; – approval of off-market contract of purchase of company’s own shares; – adherence of private company to undertaking to reregister as a public company when in receipt of money from designated investment fund. cc)

5%:

51

Some special percentages

The holders of 5% of the share capital can apply to court for reversal of a resolution of a plc to reregister as a private company

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Ireland

10 %

15% 20 %+

25%+

30 %

50 %+ 75% 80 %

90 %

100 %

II. The Stock Corporation – Public Limited Company (PLC)

The holders of 10 % of the share capital or of any class of share capital can apply to court for reversal of a resolution of a private company to provide financial assistance to a purchaser of or subscriber for shares The holders of 15% of the share capital can apply to court for reversal of a resolution of a company to alter its objects The holders of more than 20 % of the share capital or any class of share capital can block the compulsory acquisition of their shares under section 204 of the Companies Act 1963. (See 80 % below). The holders of more than 25% of the share capital can block a special resolution. The holders of more than 25% of the shares of a class can block an alteration in the rights attaching to shares of that class. The holders of 30 % of share capital of a listed public company must make a bid for the remaining 70 % of the share capital under the Irish Takeover Panel Act 1978. This majority of votes cast on a resolution will pass an ordinary resolution. This majority of votes cast on a resolution will pass a special resolution. The acquirers of 80 % of the shares of a company, or where there are different classes, of the shares of a class, can compulsorily acquire the 20 % minority of the shares or of the class of shares, as the case may be. In Plcs this will change to 90 % in April 2006. in value and majority in number This majority can pass a special resolution at short notice, i. e. without the requisite 21 days notice of the resolution having been given This is required for waiver of notice of resolution or receipt of accounting documents before a general meeting. This is required for reregistration of a limited company as unlimited.

4.

PLC Share

a)

Classes of shares.

53 There are lots of different classes of shares and where there are different classes of shares the rights which attach to these shares are normally dealt with in the articles of association. Share issued normally fall within the following categories: aa)

Ordinary Shares

54 These shares represent the basic class of share capital and also give the holders the right to attend and vote at meetings of the company, receive a share in the company’s profit in the form of a dividend and participate in the distribution of assets when the company is being wound up and the creditors paid. bb) Preference Shares

55 A preference share describes shares that give the holder certain preferential rights over ordinary shares. The preferential rights can exist in relation to the rights and duties as

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discussed above, i. e. the preferred right to payment of a dividend (once declared) before other shareholders; the preferred right in the repayment of capital during a winding up; and the preferred right as to voting. The holder of a preference share has the right to payment of a dividend which repre- 56 sents a fixed percentage of the distributable profits annually or semi-annually on a cumulative or non-cumulative basis. However, the holder of such a preference share is only entitled to receive his preferential dividend where distributable profits are available and from which it can be paid. In cases where the profit is not sufficient and the shares are cumulative, then the arrears are carried forward and are to be paid as soon as profits happen to be available. This is not the case where the preference shares are noncumulative. Usually the articles of association give the holder of preference shares the right to repay 57 capital in full on the winding up of the company once the debts and liabilities are paid. This occurs before the repayment to ordinary shareholders. Again, the articles of association can attach the right to participate in surplus assets of the company once the capital has been repaid. cc)

Convertible Shares

These types of shares are normally preference shares which can be converted into 58 ordinary shares when specific events occur or when further capital is contributed to the company. dd) Redeemable Shares

A company can issue redeemable shares which are redeemed at the option of the 59 company or the shareholder once the articles of association permit it and has in issue at the time shares whose nominal value is less than 10 % of the total issued share capital of the company. ee)

Deferred and non-voting shares

These types of shares are virtually non existent today and were usually allotted to the 60 promoters who had commenced an enterprise. Usually they carried special rights such as the right to a fixed percentage of the profits in a particular year after a specified dividend had been paid on the shares. b)

Transfer of Shares/Legal Requirements/Cost

Unless the articles of association provide otherwise, a share is freely transferable. Shares 61 in a public company that are “certified”, (i. e. evidenced by a paper share certificate) can be transferred by way of a stock transfer form. The standard stock transfer form as prescribed by statute for the transfer of fully paid shares must be executed by the transferor and need not be witnessed. The form includes the following information: transferor’s name, particulars of the consideration, and of the shares, name and address of transferee. Where the shares are not fully paid up, then the transferee also signs a stock transfer form as evidence of his acceptance of liability to meet the unpaid amount on the shares. Paula Phelan

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II. The Stock Corporation – Public Limited Company (PLC)

62 The form is then stamped by the transferee with ad valorem duty at a rate of 1% of the consideration paid or the market value of the share whichever is higher. The form is then forwarded to the secretary of the company together with the relevant share certificate for registration. Once the directors approve the transfer for registration, it is recorded in the register of members and a new share certificate is issued to the transferee. 63 A different procedure applies to Plcs quoted on the Irish Stock Exchange. Plcs also have the option of joining CREST whereby shares will be transferred in uncertificated format. CREST is a computer based system launched in Ireland in 1996 which enables shares to be transferred without a stock transfer form. c)

Own Shares

64 Subject to the exemptions set out below, no company until recently having a share capital could acquire its own shares unless it acquired its own fully paid shares otherwise than for valuable consideration. – the redemption of preference shares in pursuance of the articles and Companies Acts; – the acquisition of any shares in a reduction of capital duly made; – the purchase of any shares in pursuance of specific orders of the court; – the forfeiture of any shares, or the acceptance of the articles for failure to pay any sum payable in respect of those shares. 65 Under the requirements of the Companies Act 1990, the acquisition by a company of its own shares can occur if: – the articles of association authorize the acquisition; – a minimum of 10 % of the issued share capital comprises non-redeemable shares; – the shares which are to be acquired are fully paid up; – the purchase is approved by special resolution or where the shares are purchased on a recognised stock exchange, by ordinary resolution which specifies: (i) the maximum number of shares authorised to be acquired, (ii) the price range which may be paid for the shares, and (iii) the date on which the authority given is to expire, which may not be later than 18 months after the date of the resolution, although the company may purchase the shares after that date if the contract was concluded before that date and the authority given permits it to make a contract of purchase which would or might be executed wholly or partly after the expiration of the authority. 66 Regulations governing the purchase by companies of their own shares may be made by the Minister for Enterprise, Trade and Employment.

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5. Memorandum and the Articles of Association

5.

Memorandum and the Articles of Association

a)

Mandatory Content of memorandum of association

Ireland

67

The memorandum of association (the basic constitution of the company) of a Plc, 67 limited by shares and of a Plc limited by guarantee should be in the form as set out in the Companies (Amendment) Act 1983, Schedule 2, Part I and Part II respectively. The Companies Act 1963, Schedule 1, Table C sets out the memorandum of a public company limited by guarantee not having a share capital. The memorandum of an unlimited company having a share capital is as set out in Companies Act 1963, Schedule 1, Table E. aa)

Name of the Corporation and its Registered Office

The name clause of the memorandum provides that the words public limited company 68 or Plc is incorporated in the name of the company. The name of the Plc must end with the words “public limited company” or “cuideachta phoibli theoranta” which may be abbreviated to “p. l. c.” or “c. p. t.” respectively. If the company is an investment company, the words ‘investment company’ must appear on the letter heading and business stationery. Any reference to the share capital is be to the paid-up share capital. The registered office must be located within the jurisdiction.

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bb) Business Object

A company may only do such things that are expressly or impliedly allowed by the 70 memorandum of association. It has therefore been the practice to set out the company’s objects and powers at length, with the first paragraph stating all the activities which the company considers it may wish to undertake. The remaining paragraphs set out additional objects and powers which permit it to function in a suitable manner. cc)

Amount of Share Capital and its Dissection, Types of Share Certificates

The memorandum of association will refer to the fact that the company is a Plc and has 71 a share capital of at least J 38,092. 14.25% of this amount must be paid up and there must be at least 7 members. Share Certificates, if issued, are in paper format only. dd) Information Concerning the Management Board

For the purposes of incorporation, a form A1 must be completed containing the follow- 72 ing information: – details of the directors and secretary (note the requirement for at least one Irish resident director) with their consent to act; – the intended place or places in the state where it is proposed to carry on the activity; – intended location of registered office; – intended place for central administration; – declaration of compliance that the requirements of the Companies Acts relating to formation have been complied with; Paula Phelan

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– identification of the intended activities of the company by reference to NACE codes; – in the case of a company having a share capital, a statement of capital. ee)

Information Concerning Public Notices

73 The memorandum of association along with the articles of association and the form A1 are delivered to the Registrar of Companies with a registration fee of J 60 and companies capital duty of 1% of the capital subscribed for. b)

Additional Provisions of the Articles of Association

74 The articles of association (internal rules of the company) of a Plc, limited by shares are as set out in Companies Acts 1963, Schedule 1, Part I and depending on whether the public company limited by guarantee not having a share capital; unlimited or having a share capital then Companies Acts 1963, Schedule 1 Parts C and E will apply. c)

Amendment of the Articles of Association

75 Amendments made to the articles of association take immediate effect upon the passing of shareholders’ resolutions. As mentioned above, a special resolution is passed by at least 75% of the members of the company entitled to vote at a general meeting. A company cannot deprive itself of the right to alter its articles. 76 There are situations where members will be restricted on exercising their right to alter its articles by special resolution: – where the alterations would be contrary to law; – where an additional liability would be imposed on members; – where the alteration of articles has occurred and the members have not acted bona fide and in the interest of the company as a whole. aa)

Formally Recorded Shareholder Resolutions

77 The lodging of documentary evidence of these changes to the articles of association, change of name etc. with the Registrar of Companies is for notification purposes only. bb) Registration with the Commercial Register

78 The details of every company incorporated in Ireland or incorporated outside Ireland but having established a place of business or a branch in Ireland are lodged with the Registrar of Companies. A file is maintained by the registrar of each such company at the Companies Registration Office (“CRO”). These files can be inspected by the public for a small fee. 79 For several years there has been a document image processing system whereby documents are scanned by the CRO and stored on an optical disk.

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6. Board of Directors

d)

Ireland

80

Capital Increase/Decrease

A Company can increase its nominal or authorised share capital provided that the 80 articles of association authorise it by an ordinary resolution (simple majority). Where there is a reduction of authorised capital, which is a cancellation of unissued capital, then an ordinary resolution, is required. A reduction of issued capital other than by redemption or purchase requires a special resolution (three-quarters majority) and the courts must provide confirmation. Common methods of reduction of capital include the extinction or reduction of liability on shares in respect of share capital not paid up; the cancellation of paid-up share capital, and the paying off of any paid up share capital which is in excess of the company’s requirements.

6.

Board of Directors

Every Plc must have at least two directors, with at least one who is an Irish resident. 81 There are two exceptions to this rule: (i) where the company holds a bond in a prescribed form to the value of J 25,394.76; or (ii) where the company holds a certificate from the Registrar of Companies stating the company has a real and continuous link with one or more economic activities that are being carried out. If a director ceases to be a director and if no other Irish resident director remains on the 82 board, then within 14 days, the last remaining Irish director must inform the Registrar of Companies that this is the case. It will be the responsibility of that director to make sure that a bond is put in place. While there is no restriction on the number of directors permitted on a board, there are 83 restrictions in place as regards the number of directorships that an individual director may hold. An individual may not be a director of more than 25 companies at a particular time, however this list does not include the following companies: – a Plc; – a public company (under the Companies (Amendment) Act 1983); – a company which holds a certificate under s 44(2) of the 2001 Act (i. e., which certifies that a link between the economic activity in the Republic of Ireland, as referred to above; or – a company listed in the Second Schedule to the Companies (Amendment) (No. 2) Act 1999 or which holds a licence under section 9 of the Central Bank Act 1971, provided that on application to the Registrar of Companies on the prescribed form and including a statutory declaration by the person or an officer of the company claiming that the company falls within the three categories is accepted.

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a)

Constitution of the Board of Directors

II. The Stock Corporation – Public Limited Company (PLC)

84 There is a minimum of two directors needed for a Plc. Although there is no prohibition on certain nationals becoming directors, as mentioned above, there is a requirement for an Irish resident director subject to limited exceptions. 85 Directors of Plc’s can often have a contract of employment with the company and usually persons are appointed due to their particular expertise in a particular field. b)

Management and Representation

86 Management powers are freely determinable according to the company’s articles of association. The general powers of management are generally given to the board of directors acting as a board. The articles of association will also usually provide that the day-to-day management of the company be carried out by one of the directors, referred to as the managing director. This individual is usually appointed from and by the board of the directors. c)

Responsibilities and Personal Liability of Members of the Board of Directors

aa) To the company

87 A director has a general obligation to exercise a certain degree of care, diligence and skill in the conduct of his duties as well as acting bona fide in the best interests of the company; once established that he has done this he will not be liable where an act does not in fact turn out to have been in the best interests of the company. 88 If a director is guilty of negligence as a result of his conduct in office, then he will be liable to the company for any ensuing damage and will be open to being sued by the company. In a case where a director is guilty of a breach of trust or in the case where a benefit has been obtained for which he is liable to account to the company, then the company may take action against him. bb) To third parties

89 As a general rule, directors are agents of the company, and therefore are not personally liable on contracts which allege to bind the company. However, where a director does not possess the authority to enter into a contract then he is open to an action for breach of damages of an implied warranty of authority. Notwithstanding this, a director can contract to become personally liable in certain situations. 90 A director who is party to a fraud or a tort will be personally liable to third parties, regardless of the fact that the company may also be liable. 91 Under the Companies Acts, directors may also find themselves liable either in a personal capacity or collectively when the company breaches company law, e. g. if the company fails to file its annual returns, gives untrue or wilful non-disclosure in a prospectus, or alternatively an irregular allotment where the director acted “knowingly”. As well as this, directors may be liable for reckless trading and also during the winding 408

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up of a company where it appears that the business of the company was carried on with intent to defraud creditors or any other persons for fraudulent purpose. A director may also be indemnified in relation to an application under the Companies 92 (Amendment) Act 1983 where, in breach of that Act’s provisions company’s shares are issued to its nominees or they are otherwise acquired and they are not fully paid. In such instances, company directors are liable for payment of outstanding amounts on the shares. cc)

Indemnity

The Companies Act 1963 does not provide for the articles of association to limit the 93 liability of directors for loss incurred as a result of their wilful default or actual dishonesty. However, such provision will be void if, in relation to liability incurred by a director defending criminal or civil proceedings, where the director succeeds or is acquitted, or where an application under the Companies Act is made enabling the court to relieve any officer or auditor of the company from liability for any negligence, default, breach of duty or trust, where the officer acted honestly and reasonably and the court is of the opinion he ought be excused. The Companies (Amendment) Act 1983, also allows a director to be indemnified 94 where contrary to the Acts provisions of a company acquiring the company’s own shares, a company’s shares are issued to its nominees or otherwise acquired shares that are not fully paid. In such cases the company’s directors become liable to pay outstanding amounts on the shares. dd) Compliance Statements

Section 45 of the Companies (Auditing and Accounting) Act 2003 will, when com- 95 menced, introduce new obligations on affected company directors to prepare a Compliance Policy Statement and an Annual Compliance Statement which is to be included in the Directors’ Report accompanying the company’s audited financial statements. All public limited companies (whether listed or not) and all private company’s whose balance sheet total for the year exceeds J 7.6 million or whose turnover exceeds J 15.23 million will be affected. Directors will be required to provide the following details in a Compliance Policy Statement: – Its policies regarding compliance with its obligations under the Companies Acts, tax legislation and other “relevant obligations”; – Its internal financial and other procedures for securing compliance with those relevant obligations; and – Its arrangements for implementing and reviewing the effectiveness of the policies and procedures referred to above. The Directors’ Compliance Statement must be in writing and submitted for approval by 96 the board of directors. It must be reviewed at least once in every 3 year period following its approval by the board, and, if necessary, revised by the directors. ee)

Related Statement

Directors are further obliged to include in the directors’ report a statement: Paula Phelan

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– acknowledging that they are responsible for securing the company’s compliance with its relevant obligations; – confirming that the company has internal financial and other procedures in place that are designed to secure compliance with its relevant obligations, or, if not specifying the reasons; – confirming that they have reviewed the effectiveness of the company’s procedures during the year or, if this is not the case, specify the reason for this, and – specifying whether, based on the company procedures and their review of those procedures, the directors are of the opinion that they used “all reasonable endeavours” to secure the company’s compliance with its relevant obligations or, if this is not the case, specify the reasons. d)

Other Representatives of a PLC

98 Every registered Irish company is required to have a company secretary who may also act as a director. The office of company secretary for a Plc can be an onerous one with certain minimum qualifications needed. The functions of a company secretary include the making of the annual returns; keeping the minutes up to date; taking charge of registers; keeping minutes and various other requirements under the Companies Acts. It should be noted that a body corporate is permitted to act as a company secretary.

7.

Committees

99 The Board of directors of Plcs (whether listed or unlisted) must establish and sufficiently resource a committee of directors which will be known as the audit committee. The responsibilities of the committee are as follows: – reviewing prior to presentation to the Board of Directors the annual accounts of the company, or in the case of a parent company, the accounts of the group of undertakings; – determining whether the annual accounts so reviewed comply with applicable accounting standards and whether in the committee’s opinion they give a true and fair view of the company’s state of affairs and the profit and loss of the company; – determining whether the group accounts comply with applicable accounting standards and whether according to the committee’s opinion, they give a true and fair view of the state of affairs of the group of undertakings and the profit and loss of the group; – recommendation to the Board of Directors whether or not to approve the annual accounts and group accounts as reviewed; – determining in the committee’s opinion annually whether the company has kept proper books of account in accordance with the Companies Acts; – in relation to the director’s compliance statements, reviewing prior to Board of Director’s approval.

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– whether in the committee’s opinion the statement as reviewed complies with relevant sections of the Companies Acts and is fair and reasonable based on due and careful enquiry; – recommendation to the Board of Directors whether to approve the compliance statement of directors; – advising the Board of Directors as to the Board’s recommendations to the shareholders in relation to the appointment of the company’s auditor; – supervising the performance and quality of the auditor’s work and independence; – obtaining up-to-date information from the auditor in order to supervise the company’s relationship with the auditor; – recommendation in relation to the awarding of contracts to the auditor or affiliates for non audit work; – ensuring that the internal audit provisions are suitable; – reporting as regards the annual directors’ report on the committee’s activities for the year including its discharge of responsibilities for monitoring the auditor’s work; – performing all additional functions required by regulation and any other functions in relation to the company’s audit and financial management that are assigned to it by the Board of Directors.

8.

Selected Capitalisation and Liability Questions Concerning the Plc

a)

Prohibition of Repayment of Shareholders Contributions

Subject to the court’s confirmation, a limited company such as a Plc may reduce or 100 repay its capital in any way if authorised to do so by its articles and provided that the proposal to make the reduction is approved by a special resolution of the company. Reduction of capital can occur in the following situations: cancellation of paidup share capital; paying off of any paid up share capital in excess of the company’s requirements and reduction of liability on share as regards share capital not paid up. b)

Restrictions for the Repayment of Capital-Substituting Loans

Directors of companies have special obligations in situations where a company’s money 101 is being used, directly or indirectly, to help fund a purchase of that company’s shares. In all such cases, the directors have to be aware of the provisions of section 60 of the 1963 Act. The law as of 1 July 2005 replaces the existing sub-sections (12) and (13) of Section 60 102 of the 1963 Act with two new sub-sections (12) and (13). The new sub-section (12), now lists a total of thirteen exceptions to the general prohibition on the giving by a company of financial assistance for the purpose of or in connection with the purchase or subscription of shares in it or in its holding company. These exceptions will have the effect of permitting transactions over which doubts were expressed in the past as to whether or not they constituted financial assistance. The following exceptions should be noted: Paula Phelan

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– the “payment” by a company of a dividend or the making by it of any “distribution” out of profits, available for distribution, will not constitute financial assistance; – previous exceptions (i. e. the discharge of a liability carefully incurred; the lending of money in the ordinary course by a company; the provision by a company of money re employee share schemes and bona fide loans to employees) have been repeated in the new sub-section (12) and are respectively set out in paragraphs (b) (d) (e) and (f) thereof; – the provision of finance or delivery of security to refinance an existing loan or other liability (which had been previously given or provided on foot of a special resolution, passed in accordance with section 60 (2)), will not constitute financial assistance. Previously, it had always been interpreted, in practice, that refinancing of loans or other liabilities which had previously been given or provided by a company in compliance with section 60 had to be “whitewashed” under section 60. (The directors of private limited companies (but not Plcs) have the option of using the so-called whitewash procedure to avoid the general prohibition in section 60. The whitewash procedure involves the shareholders of the company passing a special resolution (not more than 12 months before the financial assistance) approving the financial assistance); – the making or giving by a company of representations, warranties or indemnities to a party in connection with a purchase or subscription for shares in the company or in its holding company will no longer constitute financial assistance; – the payment by a company of fees and expenses of the advisors of any subscriber for shares in the company or in its holding company and which are incurred in connection with that subscription will no longer be required to be “whitewashed”; – in connection with any allotment of shares by a company or its holding company, the payment by the company of commissions not exceeding 10% of the money received in respect of such allotment to intermediaries and the payment by the company of professional fees, will no longer require to be “whitewashed”. 103 New sub-section (13) provides that a public limited company may, in accordance with paragraphs (d), (e) or (f) of new sub-section (12) give financial assistance to any person only if the company’s net assets (as defined in the sub-section) are not thereby reduced or, to the extent that those assets are thereby reduced, if the financial assistance is provided out of profits which are available for dividend. c)

Liability Risks for the Management Board in the Event of Insolvency

104 Generally, the rule is that loans (including quasi-loans) to directors and connected persons of those directors are prohibited except in the following circumstances: – the total amount of the director’s loans does exceed more than 10 % of the companies net assets, as set out in the latest financial statements presented to the members. Where accounts have yet to be put before an AGM the issued share capital figure is to be used. Should it happen that the directors become aware, or ought to be reasonably aware, that the total amount outstanding 412

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exceeds the maximum threshold, then the directors must, within two months, make certain that the aggregate loans are reduced to the permitted statutory limits. – advances to directors to meet vouched expenses incurred for the business are permitted. – loans to directors in the ordinary course of the company’s business are allowable provided that the terms are no more favourable than would be offered to an unconnected person. A director of a company who authorises or permits the company to make an unlawful 105 loan to a director knowing or having reasonable cause to believe that the company was breaking the law is guilty of an offence. A person who procures a company to enter into such a transaction knowing or having reasonable cause to believe that the company was breaking the law is guilty of an offence. Maximum penalties on summary conviction is a fine of J 1,904 and/or 12 months imprisonment. For a conviction on indictment, the maximum penalty is a fine of J 12,697 and/or five years imprisonment. Directors may not rely upon the articles of association which result in the exemption or 106 indemnification of company officers from any liability in respect of negligence, default, a breach of duty or breach of trust. Therefore, although any exemption or indemnity for directors will be void, a company may provide indemnification for an officer in relation to legal costs incurred as a result of civil or criminal proceedings on the provision that he is successful in the defence of the proceedings.

9.

Record Keeping/Accounting

a)

Record Keeping and Annual Financial Statements

Every company must keep proper books of account in order to give a true and fair view 107 of the state of the company’s affairs. The accounting records should at the very least record the following: – income and expenditure; – sales and purchases; and – assets and liabilities. The records are kept at the registered offices of the company or wherever the directors 108 deem fit and must be preserved for a period of six years. Under the provisions of the Companies Act 1990, the following information must be 109 maintained on a continuous and consistent basis in order for proper books of account to be held: – record and explain the company’s transactions; – allow the financial position of the company to be determined with sufficient accuracy;

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– allow the directors ensure that the balance sheet, profit and loss account or income and expenditure account of the company complies with the requirements of the Companies Acts; – allow the company accounts to be readily and accurately audited. b)

Audit Requirements

110 Plcs are required to appoint auditors. Auditors must be approved by the Minister for Enterprise, Trade and Employment or have a professional qualification. The professional qualifications approved are: membership of the Institute of Chartered Accountants in Ireland, Institute of Chartered Accountants in England and Wales; the Institute of Chartered Accountants of Scotland; the Association of Chartered Certified Accountants, the Institute of Certified Public Accountants in Ireland and the Institute of Incorporated Public Accountants. 111 Strict requirements exist in relation to the filing of annual returns and accounts. The auditors’ report must be attached to the annual accounts and must state certain matters listed in the Companies Acts, e. g. whether the accounts give a true and fair view of the state of the company’s affairs. It is the duty of the auditors to consider whether information contained in the director’s report is consistent with the accounts to which it relates and to advise the members accordingly. 112 The 2001 Act now imposes a mandatory obligation on auditors to report breaches or even suspected breaches of law discovered in the course of the audit of law discovered in the course to the Director of Corporate Enforcement. 113 The auditors of a company will be required to undertake an annual review of the Directors’ Compliance Statement and the related statement to determine whether, in the auditor’s opinion, the statements are fair and reasonable. The auditors’ report must include a report on that review and their conclusions in this regard. If the auditors come to the opinion that the statements are not fair and reasonable, that must be reported to the directors and the conclusion must be set out in the auditors’ report accompanying the financial statements. c)

Disclosure

114 A minimum of once every calendar year, the directors must approve and sign and lay before the AGM of the company an audited profit and loss account and balance sheet dated no earlier than nine months prior to this meeting, as well as the directors’ and auditors’ reports. Plc’s are required under the Companies (Amendment) Act 1986 to file in the Companies Registration Office a balance sheet, profit and loss account, auditors’ and directors’ reports annexed to their annual report. 115 There is no time limit on the preparation of accounts; however, accounts must be laid before the members at an AGM within nine months of the year end.

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10. Taxation A company, irrespective of place of incorporation, is Irish tax resident if it is managed 116 and controlled in Ireland (i. e. the meetings are held here as well as the major policy making decisions and agreements are signed here). A company incorporated in Ireland is treated as being tax resident unless: (i) the company or related company carries on a trade in Ireland and either the company is ultimately controlled by persons resident in EU member states or in countries with which Ireland has a tax treaty, or the company or a related company is a quoted company; or (ii) the company is regarded as non-resident in Ireland under a double tax treaty. Irish tax resident companies are liable to pay corporation tax on worldwide income and 117 capital gains (subject to appropriate double taxation relief). Corporation tax is payable by companies who are not tax resident in Ireland (i. e. non-resident companies) if trading occurs here through a branch or agency. Additionally, non-resident companies may become liable to Irish capital gains tax where gains arise on the disposal of certain specified assets not used a branch or agency. Non-resident companies which do not have a branch or agency but have income arising otherwise are liable to income tax (not corporation tax) on such non-trading income. a)

Corporation Tax

The standard rates of corporation tax may be summarised as follows: – trading income from 1 January 2003 onwards is 12.5%; – non trading income from 1 January 2003 onwards is 25%.

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The 25% rate applies to trading income from dealing in and developing land other than 119 fully developed land. A 20 % rate can apply to trading income from dealing in residential land. Trading losses and charges subject to the lower rate of tax may be offset against income 120 other than that which is taxed at the lower rate on a “value and credit basis”. Manufacturing losses and charges can be used in a comparable fashion. The effect of this is to give a credit against corporation tax payable for the value of the 121 losses or charges. 10 % Corporation Tax – Manufacturing Relief The term manufacture is not defined although the legislation provides that certain 122 activities are excluded e. g. preservation, pasteurisation, cutting, mixing etc. A 10 % rate of corporation tax applies to manufacturing activities carried on in Ireland 123 until 31 December 2010 where the manufacturing trade was carried on prior to July 1998 or where the manufacturing trade was approved for grant assistance by the I. D. A. on / before 23 July 1998. Paula Phelan

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124 For qualifying operations established since 23 July 1998, the 10 % rate applied until 31 December 2002 when the 12.5% rate came into force. b)

Accounting Periods for corporate tax

125 The period within which a company makes up its accounts generally may not exceed 12 months. c)

Allowable expenses and special reliefs

126 All business expenses of a revenue nature, apart from entertainment as part of the company business are allowable. Depreciation and amortization charges are not permitted but are replaceable by special capital allowances. Restrictions however also apply on the amount of motor expenses that are deductible. This applies to capital allowances, leasing charges and running expenses. d)

Offsetting of losses against future liabilities

127 A tax loss may be offset against other income for the accounting period or the immediately preceding accounting period or alternatively carried forward against future income from the same source, depending on the source of the income. Essentially this means that trading losses which are not used against income may be offset only against profits in the immediate accounting period or in relation to future trading profits. e)

Capital gains and losses

128 Companies pay corporation tax on capital gains at the standard capital gains tax rate of 20 %.

11. Dissolution of a Corporation/Termination of the Business a)

Winding Up

129 A company can be wound up if it is solvent or insolvent. A liquidator is appointed in order to wind up the company. In accordance with the rules of the Companies Acts, the liquidator takes control of the company and, collects its assets, pays debts and makes distributions of any surplus to the members in conformity with their rights. Once the liquidation completes, the company is dissolved. 130 A company can be wound up in two ways: (i) voluntary winding up by either the members or creditors; or (ii) winding up by the court, which is a compulsory or court liquidation. 131 In the case of a court and creditor’s voluntary winding up, this usually occurs in cases of insolvency. A members’ voluntary winding up occurs when no insolvency arises.

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132

A voluntary winding up can occur in the following instances: – the period or duration of the company as fixed by the articles of association expire, or an event occurs whereby the articles provide that on its happening the company will be wound up and a special resolution is passed by the company; – the company resolves by special resolution that it be wound up voluntarily; – the company in general meeting resolves that it cannot, as a result of liabilities continue its business and therefore must be wound up voluntarily. b)

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Receivership

A receiver may be appointed in a number of ways, the most common being where the 133 receiver is appointed by a debenture holder on foot of a debenture. A receiver may also be appointed by order of the court and the Director of Corporate Enforcement now has a supervisory role in relation to receivers. The powers of receivers derive from the debenture document. The appointment of a 134 receiver does not mean that the company will cease to trade, once the receiver has completed his functions under the debenture, the role terminates and the company is free to resume business. Generally the appointment of a receiver leads on to the appointment of a liquidator as a 135 result of the company’s insolvency. c)

Examinership

The Companies (Amendment) Act 1990 as amended introduced a process allowing a 136 company a period of protection from any actions by creditors thus allowing an examiner the opportunity to investigate the affairs of the company. The appointment of an examiner comes on foot of a petition to the High Court which can be brought by the company, its directors, creditors or members of the company who at the date of the petition hold at least one tenth of the paid up voting capital. The petition not only nominates an examiner but also provides evidence demonstrating that there is a “reasonable prospect of survival of the company and the whole or any part of its undertaking as a going concern”. It also contains a report from an independent accountant. d)

The European Insolvency Regulation

This Regulation came into force in May 2002. It offers a framework for common rules in 137 relation to cross border insolvency proceedings, by providing collective insolvency proceedings for the appointment of a liquidator. The regulation does not apply to insurance undertakings, credit institutions or investment undertakings.

12. Limited Partnership with Share Capital The number of partners permitted in a Limited Partnership registered under the Limited 138 Partnership Act 1907, where such partnership “is formed the purpose of, and whose Paula Phelan

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main business consists of the provision of investment and loan finance and ancillary facilities and services persons engaged in industrial or commercial activities” was increased from 20 to 50 partners in 2004. a)

Formation/Constitution

139 The Limited Partnership Act 1907 facilitates the creation of a partnership in which some of the members may have limited liability for the debts of the partnership. A limited partnership must be registered with the Registrar of Companies. As with ordinary partnerships, bankruptcy provisions apply to limited partnerships, however when all general partners are adjudicated bankrupt, the assets of the limited partnership vest in the Official Assignee. b)

Change of General Partners and Limited Shareholders

140 There must be at least one “general partner” whose liability will be unlimited and at least one “limited partner” whose liability is limited to the amount of capital contributed by him to the partnership. The limited partner and not the general partner is required to contribute to the capital of the firm. As well as this, the limited partner is excluded from any management of the firm and must not have any authority to bind the other partners. A body corporate may act as a limited partner. 141 Any capital contributed to a limited partnership is subject to capital duty at a rate of 0.5% of the amount contributed. c)

Taxation, Record Keeping/Accounting

142 In Ireland, similar to the UK, a limited partnership is taxed as a partnership and is therefore tax transparent. A partnership as such is not chargeable to income tax. Each partner is chargeable individually to the tax referable to his share of the partnership. 143 In general, partnerships do not have to file accounts. The European Communities (Accounts) Regulations 1993 require a limited partnership where the general partners are companies with limited liability or their equivalent to file accounts, as if it was a company under the Companies (Amendment) Act 1986.

III. Limited Liability Company 1.

Character of the Private Limited Company (“Ltd”).

144 The Ltd is a company limited by shares under the Companies Acts 1963 to 2003. New legislation is due to be introduced on 1st July 2005 amending the 1963-2003 Acts.

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Ireland

145

The company’s internal affairs are governed by its articles of association. Part I and II of 145 Table A of the First Schedule to the Companies Act 1963 sets out the model articles of association for a Ltd. Section 33 of the Companies Act 1963 defines a private company as a company which 146 has a share capital and which by its articles of association: – restricts the right to transfer its shares; and – limits the number of member to 50, not including persons who are in the employment of the company and persons who, having been formerly in the employment of the company, were, while in that employment, and have continued after the determination of that employment to be member of the company; and – prohibits any invitation to the public to subscribe for any shares or debentures of the company. There exist a number of different types of private limited company. For example: – private companies limited by shares; – private companies limited by guarantee and having a share capital; – private unlimited companies having a share capital; – single member private limited companies (European Communities (SingleMember Private Limited Companies) Regulations 1994).

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No minimum capital required, but shares must have a par value (save in the case of an 148 investment company with variable capital) and two shares are generally issued. It is possible, however, to issue one share in a single member private limited company. No more than 90 % of the nominal shares. There is a minimum requirement of J 25,395 where a private company has a restricted director.

2.

Formation of a Ltd

a)

Formation procedure

aa)

Execution of the formation documents

Ltd can be formed in the same manner as a public company. The documents must be 149 filed with the Registrar of Companies specifically the memorandum and articles of association and form A1. The form A1 contains the following information: – statement of directors and secretary; – statement of intended situation of the registered office of the company; – statement of the intended place where the central administration of the company will normally be carried on; – statement of the intended place or places in the State where it is proposed to carry on an activity. – declaration of compliance with the requirements of the Companies Acts relating to the formation have been complied with: Paula Phelan

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(i) identification of the intended activities by reference to NACE codes and place in Ireland of intended economic activity of the company; (ii) in the place of companies have a share capital, a statement of capital. 151 Private companies limited by guarantee and having a share capital require all of the above documentation but there are slight amendments that are needed, most notably, the appropriate memorandum of association is Part I of Table D, Schedule 1 of the Companies Act, 1963 and the appropriate articles of association is Part III of the said Table D. 152 Private unlimited companies having a share capital also requires all of the above documentation but there are slight amendments that are needed, most notably, the appropriate memorandum of association is Part I of Table E, Schedule 1 of the Companies Act, 1963 and the appropriate articles of association is Part III of the said Table E. b)

Registration procedure/commercial registers

153 There is one single unified registry for companies known as the Companies Registration Office. The EU directive on company law adopted on the 9 March 1968, has been implemented in Ireland by the European Communities (Companies) Regulations 1972 (SI 1973/163). This directive requires Ireland to appoint a Registrar of Companies. Such a measure has already been dealt with under section 368 of the Companies Act 1963. c)

Approval requirements

154 All documentation must conform to statute and forms order. d)

Shelf companies

155 Companies (Amendment) No. 2 Act 1999, section 42 has obstructed the formation of the shelf companies by reason of the new requirement that, on formation, all companies must carry on an activity in the status of this requirement can be mitigated, however, by incorporating a company temporarily engaged in a recognised activity. e)

Cost/Duration

156 Full incorporation costs for registration and filing fees are J 60 plus 0.5% capital duty on issued capital, subject to a minimum of J 1. All other non-statutory fees (e. g. lawyers’ fees) are variable. 157 Assuming that all documentation is in order, the process should take around 15 days. They are however two methods to expedite incorporation, the “10 day company formation” (known as the f phrainn scheme) and the electronic company formation scheme (known as the CRO Disk) which can take 5 days.

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The 10 day scheme is limited to those companies which are immediately required for 158 trading purposes, with the company using a standard form memorandum and articles of association. To avail of the CRO Disk, the firm needs to be a member of the f phrainn scheme. 159 f)

Requested Information on Business Letters

The full name of the company, its place of registration and the number with which it is 160 registered must appear. The forename(s) or initial(s) and surname of each director must be included. If a director is not of Irish nationality, the director’s nationality must be stated. It is possible to obtain a licence from the Minster for Enterprise, Trade and Employment to dispense with the requirement to include the directors’ names; in that case, no names of directors need (or may) be printed on the letter-heading. The fact that a company is incorporated with limited liability must be stated (Section 4 of the Companies (Amendment) Act 1983). The name of the Ltd must end with the words “limited” or “teoranta” which may be 161 abbreviated to “L. t. d.” or “Teo” respectively. If the company is an investment company, the words ‘investment company’ must appear the letter heading and business stationery. Also if there is reference to the share capital then such reference shall be to the paid-up share capital (Section 9 of European Communities (Companies) Regulations, 1973). Certain limited companies (other than public limited companies) with charitable or 162 public purposes may register without the word “limited” or “teoranta” or their respective abbreviations. To be exempted from the use of the words ‘Limited’, ‘Ltd’, ‘Teoranta’ or ‘Teo’ in the name, the company’s objects must be the promotion of commerce, art, science, education, religion, charity or any other prescribed object and the memorandum or articles must require the company’s profits to be applied to those objects and must prohibit the payment of dividends to members. The memorandum and articles of association must also provide that, on winding up, the assets must not be distributed among the members but must be transferred to another body having similar objects. A statutory declaration by the director or secretary declaring that the company complies, or where applicable, will comply with the above requirements, will be lodged with the Registrar of Companies.

3.

The Shareholder /the Shareholder Meeting

a)

Rights and Duties of a Shareholder

aa) Voting

A company’s share capital may be divided into several classes of share to which the 163 right to vote may apply either in a restricted or non restricted form. The articles of association govern the right to vote at meetings as well as establishing the voting rights to be attached to each class of share.

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– Voting on a show of hands Questions which arise at general meetings are decided initially by a show of hands, unless otherwise provided for in the articles of association or where a poll is called. Each member in attendance at the meeting and holding an entitlement to vote has one vote, irrespective of the number of shares held. – Voting on a poll Members may demand a poll, except in the situation where the chairman is being elected or when voting for adjournments. Refusal of a poll is not permitted when at least five members or the holders of at least 10% of the issued share capital who have a right to attend and vote at the meeting have requested that a poll occur. When a poll is called, it is one share one vote, save where the articles otherwise provide. Table A provides that a poll must take place if sought by (i) the chairman (ii) 3 members present (iii) a holder or holders of 10 % of the share capital of the company. – Proxies A proxy may be appointed by a member of the company having a share capital who is entitled to attend and vote at meetings to attend and vote in his place. Such a proxy need not be a member of the company and will have the same right as the member to speak at the meeting and vote. bb) Dividends

164 A dividend is a distribution of the profits of a company made to its members. Every company has this implied power which does not become payable until the dividend is declared. Usually the practice is to provide in the articles of association that the members in general meeting declare the dividend however it is not to exceed the amount recommended by the directors. Directors can under the articles of association pay an interim dividend prior to ascertaining the full results of the company’s business for the financial year end. 165 Dividends are payable only out of the profits available for that purpose. These are accumulated, realised profits of the company, so far as not previously utilised by distribution or capitalization, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganization of capital duly made. Although interim or initial accounts may be referred to, it is the most recent annual audited accounts that are referred when determining whether or not a company may declare a dividend. 166 There is no legal obligation on the company to pay a dividend, even where there are sufficient distributable profits available, unless the memorandum and articles of association provide otherwise. 167 There is also no entitlement to a dividend once a winding up of the company occurs. cc)

Capital

168 A company’s share capital can be divided into several classes of shares that may have differing nominal values and grant different rights to the holders. Different classes are usually given distinctive descriptions such as “ordinary”, “preference” or “deferred”. 422

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169

Ordinary shares usually describe that class of shares which confers on their holders the right to receive all profits which the company resolves to distribute as well as to receive the balance of any surplus accessible to shareholders on liquidation after payment of amounts due to preference shareholders in that event. Subject to confirmation by the court, a Ltd may reduce or repay its capital in any way if 169 authorised to do so by its articles and provided that the proposal to make the reduction is approved by a special resolution of the company. Common methods of reduction of capital include the extinction or reduction of liability on shares in respect of share capital not paid up; the cancellation of paidup share capital, and the paying off of any paid up share capital which is in excess of the company’s requirements. Non-consenting shareholders must rely upon the refusal of the court to sanction the reduction of capital on the grounds that either it is not fair and equitable or that it is not in the public interest. Creditors have a statutory right to object to the reduction of capital. dd) General Meetings (1)

Annual general meeting

The two types of general meetings of company’s shareholders are the annual general 170 meeting (AGM) and the extraordinary general meeting (EGM). The AGM must be held by a company once in each calendar year and must not be held 171 more than 15 months after the previous one. The first AGM for a company may be held however any time within 18 months after the date of incorporation. The purpose of an AGM is to provide a forum whereby the directors can comply with their statutory duties. The minimum statutory requirement is the placing before the meeting of a balance sheet, profit and loss account, auditors’ reports and directors’ report on the state of the company’s affairs. In addition to this, the articles of association can provide that the following issues are also dealt with: (i) the declaration of a dividend; (ii) the election of directors in the presence of those retiring; (iii) the reappointment of a retiring auditor; and (iv) the fixing of the remuneration of the auditors. The above would be classified as the “ordinary” business of the meeting. Other business 172 dealt with at the meeting is known as “special” business and the notice of the meeting will refer to what matters will be dealt with. To pass an “ordinary” resolution of the company, a majority of 50 % plus one of the 173 shareholders must be achieved. To pass a “special” resolution of the company, a majority of 75% of the shareholders must be achieved. Extraordinary general meeting The EGM refers to any meeting other than the AGM and is usually convened by the 174 directors of the company. Directors may call an EGM whenever they deem fit but subject to the giving of proper notice. However, it may also be requisitioned by members holding not less than one tenth of the paid up capital of the company carrying voting Paula Phelan

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Ireland

III. Limited Liability Company

rights if the objects of the meeting are signed by the requisitionists and deposited at the company’s registered office. Failure by the directors to convene a meeting within 21 days from the date on which the requisition is deposited means that the requisitionists can convene a meeting themselves within 3 months from the date of deposit of the requisition. (2)

Notice and conduct of general meetings

175 The only persons who must be notified of a general meeting are those entitled to attended, i. e. the members and the auditors, unless the articles of association provide otherwise. The articles of association provide for the method of service and the notice must be in writing. It will state the date, time and place of the meeting, and contain enough specifics of the business to be conducted to enable the shareholders to decide how they will vote. In the case of an AGM, a copy of the balance sheet, profit and loss account, auditor’s report and director’s report must be sent to every debenture holder at least 21 days before the meeting. 176 In the case of an AGM, the minimum length of notice is 21 days and not less than 14 days in the case of other meeting s of the company. Again the articles of association may provide for different notice periods. For a special resolution, 21 days notice must be given and meetings to be called at shorter notice may be called if the company’s auditors and members entitled to attend and vote all agree. 177 The proceedings for general meetings are normally regulated by the articles of association. The articles may also provide for a quorum, if not, then three members personally present will amount to a quorum. A meeting will not be valid unless a quorum is present. It is usual under the articles of association for the chairman of the board of directors to act as chair. Generally the chairman of the meetings will have a second or casting vote in the occurrence of a tie. ee)

Protection of Minority Shareholders

178 Both under common law and by statute, the law seeks to protect the minority’s right in a company. 179 At common law, the basic principle is that only the company could maintain proceedings in respect of wrongs done to it and the shareholders did not have a right of action in such situations whether it was in their own name or that of the company. There are four main exceptions to this principle: (i) where the alleged wrong is illegal or ultra vires to the company (i. e. outside its objects); (ii) where the alleged wrong is actioned by the requisite special resolution passed by a majority of three-fourths of the members; (iii) the alleged wrong is a fraud on the minority of the company which has been committed by the majority; (iv) the alleged wrong infringes the individual rights of the plaintiff member.

424

Paula Phelan

3. The Shareholder/the Shareholder Meeting

Ireland

180

The remedy available to the minority shareholder is by way of “derivative” action, 180 whereby it derives from the injury to the company as opposed to the individual shareholder or “representative” action where it is brought on behalf of a number of shareholders. The statutory position of the minority shareholders was at one time a petition for the 181 winding up of the company. Where it would be “just and equitable” to do so which would include a situation where the minority of members were being treated unfairly. Under the Companies Acts 1963, an application could be made to the court by a member of the company who complains that its affairs were being conducted in an oppressive manner either in relation to him or other members which disregarded their interests as members. This could also include director’s powers being exercised in a manner that an application to the court to remedy a particular state of affairs would be appropriate. The court could then make a number of orders aimed at resolving the state of affairs complained of. Additionally, the members of a company may apply to the High Court (or the Director 182 if Corporate Enforcement see below) in order to appoint an inspector to carry out an investigation of the company. Such an application would need to be brought by the members holding not less than one-tenth of the paid up capital of the company. Security for costs may be requested by the court. Under the 2001 Act, the power to investigate the affairs of companies has been handed 183 to the Director of Corporate Enforcement. The increased powers available under the Act include powers include the examination and production of the books and records of the company, an increase in the grounds available for search warrants, the introduction of new offences in relation to the destruction of documentation, as well as increasing the number of persons to whom information which arises in the course of investigation can be revealed to. ff)

Shareholder’s Duties

The principal duty of a shareholder is to pay whatever remains unpaid in relation to a 184 share. The amount is payable once a call is made by the company or where terms of an agreement call for instalment payments. If a company is being wound up, a shareholder’s liability for past and future calls will continue, and forms part of the creditors’ fund. The duty in regards to calls is contractual. Once a call is made, it becomes a debt and is actionable by the company against the shareholder for 12 years. Liability for future calls is transferred to any shareholder who takes by transfer or transmission. Usually the articles of association contain the rules for the making of a call, and calls should be made pari passu unless the articles state otherwise. Other duties which apply to shareholders would be the duty to account to the company 185 for dividends received in contravention of the rules available on profits, as well as personal liability for company debts.

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186

Ireland

b)

Shareholder Meetings/Shareholder Resolutions

III. Limited Liability Company

186 The Irish Companies Acts specify that certain things may occur only where a particular majority of shareholders has voted in favour. aa)

Ordinary Resolution

187 This is a resolution which has been passed by simple majority at a quorate meeting. It is sometimes incorrectly described as a resolution passed by 51% majority. It is correct to state that it is a resolution passed where more than 50 % of the votes cast were in favour. If the vote is 50:50 and the chairman casts his casting vote (where the chairman has such casting vote), then that suffices to pass an ordinary resolution. 188 The principal matters that are dealt with by ordinary resolution are: – increase in authorised capital; – cancellation of unissued capital; – authorisation of directors to issue share capital; – receipt and approval of accounts at annual general meetings; – declaration of dividend (the directors can typically vote interim dividends); – election and removal of directors (the directors typically have parallel powers); – appointment and removal of auditors (the directors can make appointments); – winding up of the company where it is insolvent. bb) Special Resolution

189 This is a resolution which has been passed by not less than a 75% majority at a quorate meeting. Once 75% of the votes are in favour, the resolution will be passed. There is no place for a chairman’s casting vote on a special resolution. 190 The principal matters that are dealt with by special resolution are: – amendments of articles of association; – alteration in objects clause; – change of name; – provision of financial assistance to a purchaser of or subscriber for shares in a company: note that a public limited company or a subsidiary of a public limited company may not provide such assistance to a purchaser of or subscriber for the public limited company’s shares; – issue of shares at a discount: note, this can only be done with the approval of the court; – certain redemptions of shares; – reduction of issued capital: note, in a limited company this can only be done with the approval of the court; – variations in rights on shares: note that where there are separate classes of shares there must be separate special resolutions passed within the various classes of shares, and the quorum for these class resolutions is 331/3 % of the shareholders of each class; – approval of assignment of office by directors;

426

Paula Phelan

3. The Shareholder/the Shareholder Meeting

Ireland

191

– winding up of the company while solvent; – approval of certain actions and transactions by liquidator of company being wound up; – authorisation of directors to issue share capital other than pro rata to existing shareholders; – private company reregistering as public limited company; – public limited company reregistering as private limited company; – unlimited company reregistering as limited company, private or public; – conversion of shares from non-redeemable to redeemable; – approval of off-market contract of purchase of company’s own shares; – adherence of private company to undertaking to reregister as a public company when in receipt of money from designated investment fund. cc)

Some special percentages

5%: 10 %

15% 20 %+

25%+

30 %

50 %+ 75% 80 %

90 %

100 %

The holders of 5% of the share capital can apply to court for reversal of a 191 resolution of a public limited company to reregister as a private company The holders of 10 % of the share capital or of any class of share capital can apply to court for reversal of a resolution of a private company to provide financial assistance to a purchaser of or subscriber for shares The holders of 15% of the share capital can apply to court for reversal of a resolution of a company to alter its objects The holders of more than 20 % of the share capital or any class of share capital can block the compulsory acquisition of their shares under section 204 of the Companies Act 1963. (See 80 % below). The holders of more than 25% of the share capital can block a special resolution. The holders of more than 25% of the shares of a class can block an alteration in the rights attaching to shares of that class. The holders of 30 % of share capital of a listed public company must make a bid for the remaining 70 % of the share capital under the Irish Takeover Panel Act 1978. This majority of votes cast on a resolution will pass an ordinary resolution. This majority of votes cast on a resolution will pass a special resolution. The acquirers of 80 % of the shares of a company, or where there are different classes, of the shares of a class, can compulsorily acquire the 20 % minority of the shares or of the class of shares, as the case may be. in value and majority in number This majority can pass a special resolution at short notice, i. e. without the requisite 21 days notice of the resolution having been given This is required for waiver of notice of resolution or receipt of accounting documents before a general meeting. This is required for re-registration of a limited company as unlimited.

Paula Phelan

192

427

193

Ireland

4.

Ltd Share

a)

Classes of shares

III. Limited Liability Company

193 There are lots of different classes of shares and where there are different classes of shares the rights which attach to these shares are normally dealt with in the articles of association. Any creation or amendments of shares of the company must be reflected in the articles of association and registered with the Companies Registration Office. Share issued normally fall within the following categories: aa)

Ordinary Shares

194 These shares represent the basic class of share capital and also give the holders the right to attend and vote at meetings of the company, receive a share in the company’s profit in the form of a dividend and participate in the distribution of assets when the company is being wound up and the creditors paid. bb) Preference Shares

195 A preference share describes shares that give the holder certain preferential rights over ordinary shares. The preferential rights can exist in relation to the rights and duties as discussed above, i. e. the preferred right to payment of a dividend (once declared) before other shareholders; the preferred right in the repayment of capital during a winding up; and the preferred right as to voting. 196 The holder of a preference share has the right to payment of a dividend which represents a fixed percentage of the distributable profits annually or semi-annually on a cumulative or non-cumulative basis. However, the holder of such a preference share is only entitled to receive his preferential dividend where distributable profits are available and from which it can be paid. In cases where the profit is not sufficient and the shares are cumulative, then the arrears are carried forward and are to be paid as soon as profits happen to be available. This is not the case where the preference shares are noncumulative. 197 Usually the articles of association give the holder of preference shares the right to repay capital in full on the winding up of the company once the debts and liabilities are paid. This occurs before the repayment to ordinary shareholders. Again, the articles of association can attach the right to participate in surplus assets of the company once the capital has been repaid. cc)

Convertible Shares

198 These types of shares are normally preference shares which can be converted into ordinary shares when specific events occur or when further capital is contributed to the company.

428

Paula Phelan

4. Ltd Share

Ireland

199

dd) Redeemable Shares

A company can issue redeemable shares which are redeemed at the option of the 199 company or the shareholder once the articles of association permit it and has in issue at the time shares whose nominal value is less than 10 % of the total issued share capital of the company. ee)

Deferred and non-voting shares

These types of shares are virtually non existence today and were usually allotted to the 200 promoters who had commenced the enterprise. Usually they carried special rights such as the right to a fixed percentage of the profits in a particular year after a specified dividend had been paid on the shares. ff)

Treasury shares

There shares are redeemed, the company, instead of cancelling them, may retain them 201 as treasury shares. While retained as treasury shares, the company will be unable to exercise the rights as to dividend and voting associated with the shares. gg) Bonus shares

These types of shares occur when the company capitalises profits or revenue reserves or 202 some permissible fund, such as the share premium account or capital redemption reserve fund, and applied the proceeds in paying up bonus shares which are then given, normally, to existing members in proportion to their entitlement to dividend. The bonus share is a fully or partly paid up share in the company, paid for by the company out of permissible funds. (hh) Employee shares

There is no legal requirement in Ireland for a company to allot shares to its employees. 203 b)

Transfer of Shares/Legal Requirements/Cost

Unless the articles of association provide otherwise, a share is freely transferable.

204

Shares in a Ltd, usually evidenced by a paper share certificate, can be transferred by the 205 registered owner or someone on his behalf by way of a stock transfer form. The standard stock transfer form as prescribed by statute for the transfer of fully paid shares must be executed by the transferor and need not be witnessed. The form includes the following information: transferor’s name, particulars of the consideration, and of the shares, name and address of transferee. Where the shares are not fully paid up, then the transferee also signs a stock transfer form as evidence of his acceptance of liability to meet the unpaid amount on the shares. The form is then stamped by the transferee with ad valorem duty at a rate of 1% of the 206 consideration paid or the market value of the share whichever is higher. There are certain exceptions to the requirement to pay the 1% stamp duty such as shares passing on death of the holder.

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207

Ireland

III. Limited Liability Company

207 The form is then forwarded to the secretary of the company together with the relevant share certificate for registration. Once the directors approve the transfer for registration, it is recorded in the register of members and a new share certificate is issued to the transferee. 208 The articles of association of the Ltd must restrict the rights of shareholders to transfer their shares. Shareholders may also enter into a shareholders’ agreement dealing with the transfer of shares mechanics. 209 Under the model articles of association, many Ltds confer the right of pre-emption or right of first refusal. This allows the shareholder to buy the shares which are for sale before they can be offered to persons or bodies not connected to the company. 210 Following the death of a shareholder, the grant of probate or letters of administration evidencing who are the shareholder’s personal representatives should be exhibited to the company. The company secretary will check the document and note the death on the register of members. The company secretary may dispense with the requirement to produce a grant of probate or letters of administration. In such circumstances the secretary should obtain an appropriate statutory declaration and indemnity. 211 On a person being adjudicated bankrupt any shares he holds in the company will automatically vest in the official assignee in bankruptcy. 212 Shares may be transferred compulsorily in either three ways: – in accordance with the articles of association; – by Court Order pursuant to an application by any member of the company who complains that the affairs of the company are being conducted or that the powers of the directors of the company are being exercised in a manner oppressive to him or any of the shareholders; – under the Irish Companies Acts where one company offers to purchase the shares in a target company which has been accepted by at least 80 % of the shareholders of that target company. This facilitates a 100 % takeover of the target company. c)

Own Shares

213 Under the provisions Irish Companies Acts, the acquisition by a company of its own shares can occur if: – the articles of association authorise the acquisition; – a minimum of 10 % of the issued share capital comprises non-redeemable shares; – the shares which are to be acquired have been fully paid up; – the funding only comes from distributable profits; – the purchase is approved by special resolution; – the purpose is to redeem preference shares; – the purposes is to acquire any shares to reduce capital; – ordered by Court;

430

Paula Phelan

5. The Memorandum and Articles of Association

Ireland

214

– the forfeiture of any shares, or the acceptance of any shares surrendered in lieu, in pursuance of the articles for failure to pay any sum payable in respect of those shares; – a contingent purchase contract is entered into by the company under which the company may become entitled or obliged to purchase the shares as defined in the contract. Please note that the Irish Companies Acts prohibit the Ltd, directly or indirectly 214 providing financial assistance for the purchase or subscription of its own shares. This may be negated by conducting a whitewash procedure.

5.

The Memorandum and Articles of Association

a)

Mandatory Content

The memorandum of association of Ltd, should be in the form as set out in the 215 Companies Act 1963, Schedule 1 Tables B, C, D, and E, ‘or as near thereto as circumstances admit’. The five compulsory clauses are: (a) The name clause; (b) The objects clause; (c) The liability clause; (d) The capital clause; (e) The association or subscription clause. The articles of association form the other part of the company’s constitution and 216 regulate the management of the company in its internal affairs. The memorandum prevails in the case of any inconsistency between the two documents. The model articles will automatically apply in the case of a company which does not register articles or where articles are registered, except to the extent that they are modified or excluded by the registered articles. Usually the articles provide for: (a) the company’s capital structure and its alteration; (b) the procedure for the transfer or transmission of shares; (c) the calling of and proceedings at general meetings; (d) the appointment and removal of directors, their powers and duties, and the proceedings at their meetings; (e) the payment of dividends; and (f) the procedure on the winding up of the company. aa)

Name of the Corporation and its Registered Office

The Ltd company name must be registered with the Companies Registration Office. 217 The Registrar of Companies determines whether a name is acceptable and desirable. A company name may be refused where it is already in existence, offensive, misleading or otherwise objectionable. A company may appeal to court in cases of refusal. The name of the Ltd must end with the words “limited” or “teoranta” which may be 218 abbreviated to “L. t. d.” or “Teo” respectively. Paula Phelan

431

219

Ireland

III. Limited Liability Company

219 Certain limited companies (other than public limited companies) with charitable or public purposes may register without the word “limited” or “teoranta” or their respective abbreviations. To be exempted from the use of the words ‘Limited’, ‘Ltd’, ‘Teoranta’ or ‘Teo’ in the name, the company’s objects must be the promotion of commerce, art, science, education, religion, charity or any other prescribed object and the memorandum or articles must require the company’s profits to be applied to those objects and must prohibit the payment of dividends to members. The memorandum and articles of association must also provide that, on winding up, the assets must not be distributed among the members but must be transferred to another body having similar objects. A statutory declaration by the director or secretary declaring that the company complies, or where applicable, will comply with the above requirements, will be lodged with the Registrar of Companies. 220 The company must have a registered office within Ireland. This requirement is to ensure that the company has an address to which all communications and other notices may be sent. bb) Business Object

221 A company may only do such things that are expressly or impliedly allowed by the memorandum of association. It has therefore been the practice to set out the company’s objects and powers at length, with the first paragraph stating all the activities which company considers it may wish to undertake. The remaining paragraphs set out additional objects and powers which permit it to function in a suitable manner. cc)

Amount of Share Capital and its Dissection, Types of Share Certificates

222 The company is also required in its memorandum of association to state in its capital clause the total amount of the company’s authorised share capital. It is common for the authorised share capital to be a relatively high figure and the issued share capital to be low. 223 No minimum capital required, but shares must have a par value (save in the case of an investment company with variable capital) and two shares are generally issued. It is possible, however, to issue one share in a single member private limited company. No more than 90 % of the nominal shares. There is a minimum of J 25,395 where a private company has a restricted director. 224 Share certificates are required to be delivered to shareholders within two months of the allotment or transfer. It is not necessary that a separate certificate be issued for each share held by the shareholder. The share certificate is prima facie evidence of his title to the shares held by him and in paper format. dd) Information Concerning the Management Board

225 For the purposes of incorporation, a Form A1 must be completed containing the following information: – statement of directors and secretary; – statement of intended situation of the registered office of the company;

432

Paula Phelan

5. The Memorandum and Articles of Association

Ireland

226

– statement of the intended place where the central administration of the company will normally be carried on; – statement of the intended place or places in the State where it is proposed to carry on an activity. – declaration of compliance with the requirements of the Companies Acts relating to the formation have been complied with: (i) identification of the intended activities by reference to NACE codes and place in Ireland of intended economic activity of the company; (ii) in the place of companies have a share capital, a statement of capital. ee)

Information Concerning Public Notices

The memorandum of association along with the articles of association and the Form A1 226 are delivered to the Registrar of Companies with a registration fee of J 60 and companies capital duty of 1% of the capital subscribed for. Ltd is required to publish in the Iris Oifigiu´il (official publication) notice of delivery 227 to, or the issue by the Registrar of Companies, of the following documents and particulars: – any certificate of incorporation; – the memorandum and articles of association, or equivalent documents, or documents amending them, together with the amended documents; – any return relating to the directors or a change in the directors; – any return relating to the persons, other than the board of directors, who are authorised to enter into transactions binding the company, or notification of a change among such persons; – its annual returns; – any notice of its registered office or of a change; – any copy of a winding-up order; – any order for the dissolution of the company; – any return by a liquidator of the final meeting of the company on a winding up. b)

Additional Provisions of the Articles of Association

Table A, Part I of the First Schedule to the Companies Act 1963, the model articles of 228 Ltd deals with the folvowing: – share Capital and Variation of Rights; – lien; – calls on shares; – transfer of shares; – transmission of shares; – forfeiture of shares; – conversion of shares into stock; – alteration of capital; – general meetings; – notice of general meetings; – proceedings at general meetings; – votes of members; Paula Phelan

433

229

– – – – – – – – – – – – – – – – – c)

Ireland

III. Limited Liability Company

bodies corporate acting by representatives at meetings; directors; borrowing powers; powers and duties of directors; disqualification of directors; rotation of directors; proceedings of directors; managing directors; secretary; the seal; dividends and reserves; accounts; capitalisation of profits; audit; notices; winding up; indemnity. Amendment of the Articles of Association

229 Amendments made to the articles of association take immediate upon the passing of shareholders’ resolutions. As mentioned above, a special resolution is passed by at least 75% of the members of the company entitled to vote at a general meeting. A company cannot deprive itself of the right to alter its articles. 230 There are situation where members will be restricted on exercising their right to alter its articles by special resolution: – where the alterations would be contrary to law; – where an additional liability would be imposed on members; – where the alteration of articles has occurred and the members have not acted bona fide and in the interest of the company as a whole. aa)

Formally Recorded Shareholder Resolutions

231 The lodging of documentary evidence of these changes to the articles of association, change of name etc. with the Registrar of Companies is for notification purposes. bb) Registration with the Commercial Register

232 The details of every company incorporated in Ireland or incorporated outside Ireland but having established a place of business or a branch in Ireland are lodged with the Registrar of Companies. A file is maintained by the registrar of each such company at the Companies Registration Office (“CRO”). These files can be inspected by the public for a small fee. 233 A special resolution is recorded in the Companies Registration Office by lodging a G1 form together with the wording of the approved resolution and the amended articles of association.

434

Paula Phelan

6. Board of Directors

d)

Ireland

234

Capital Increase/Decrease

A Company can increase its nominal or authorised share capital provided that the 234 articles of association authorise it by an ordinary resolution (simple majority). Where there is a reduction of authorised capital, which is a cancellation of unissued capital, then an ordinary resolution, is required. A reduction of issued capital other than by redemption or purchase requires a special resolution (three-quarters majority) and the courts must provide confirmation. Common methods of reduction of capital include the extinction or reduction of liability on shares in respect of share capital not paid up; the cancellation of paid-up shares capital, and the paying off of any paid up share capital which is in excess of the company’s requirements. The courts may also order the reduction of a company’s capital by ordering the company 235 to purchase its own shares which is noted above.

6.

Board of Directors

Every Ltd must have at least two directors, with at least one who is an Irish resident and 236 each company must also have a secretary who may be one of the directors. There are two exceptions to this rule, (i) where the company holds a bond in a prescribed form to the value of J 25,394.76 or (ii) where the company holds a certificate from the Registrar of Companies stating the company has a real and continuous link with one or more economic activities that are being carried out. If a director ceases to be a director and if no other Irish resident director remains on the 237 board, then within 14 days, the last remaining Irish director must inform the Registrar of Companies that this is the case. It will be the responsibility of that director to make sure that a bond is put in place. There is no restriction on the number of directors permitted on a board. However, an 238 individual may not be a director of more than 25 companies at a particular time but this list does not include the following companies: – a Plc; – a public company (under the Companies (Amendment) Act 1983); – a company which holds a certificate under s 44(2) of the 2001 Act (i. e., which certifies that a link with an economic activity in Ireland); – a company listed in the Second Schedule to the Companies (Amendment) (No. 2) Act 1999 or which is a company that is the holder of a licence under Section 9 of the Central Bank Act 1971 (or is exempt from the requirement to hold such a licence). If a person is a director of both a holding company and its subsidiary, those two 239 directorships are treated as one directorship for the purpose of determining the number of directorships a person holds.

Paula Phelan

435

240

Ireland

III. Limited Liability Company

240 When a director changes his address or particulars, he must notify the Companies Registration Office. Originally, where the person who is a director of more than one company, he would have to lodge a notification in respect of each company. From the 1st July 2005, one notification is required and the Companies Registration Office may proceed to record the relevant change or changes concerning the person in relation to each of the relevant companies. 241 There are different types of directors including executive and non-executive. Both types do not have a statutory definition. An executive director participates in the day-to-day management of a company and a non-executive director usually confines his role to the boardroom. Nevertheless the board is considered as one unit or the only tier. 242 Remuneration of the directors is usually dealt with by committee being an autonomous part of the board. Under the model articles of association, the directors may delegate any of their powers to committees consisting of such member or members of the board as they think fit. a)

Managing Directors

243 A managing director may be appointed under the model articles of association of Ltd and is not subject to the normal rules as to rotation of directors but their appointment will be automatically terminated if they cease to be directors, for any reason. The directors determine the remuneration of the managing director. 244 The directors may entrust to and confer upon a managing director any of the powers exercisable by them upon such terms and conditions and with such restrictions as they may think fit, and either collaterally with or to the exclusion of their own powers, and may from time to time revoke, withdraw, alter or vary all or any of such powers. 245 The powers of the managing director will depend on the internal arrangements made. b)

Management and Representation

246 Management powers are freely determinable according to the company’s articles of association. The general powers of management are generally given to the board of directors acting as a board. c)

Responsibilities and Personal Liability of Directors

aa) To the company

247 A director has a general obligation to exercise a certain degree of care, diligence and skill in the conduct of his duties as well as acting bona fide in the best interests of the company; once established that he has done this he will not be liable where an act does in fact turn out to have been in the best interests of the company. 248 If a director is guilty of negligence as a result of his conduct in office, then he will be liable to the company for any ensuing damage and will be open to being sued by the 436

Paula Phelan

6. Board of Directors

Ireland

249

company. In a case where a director is guilty of a breach of trust or in the case where a benefit has been obtained for which he is liable to account to the company, then the company may take action against him. bb) To third parties

As a general rule, directors are agents of the company, and therefore are not personally 249 liable on contracts which allege to bind the company. However, if a director lacks authority to enter into a contract he could be open to an action for damages for breach of an implied warranty of authority, i. e., for misrepresenting that he had such authority. A director may contract to make himself personally liable. A director who is a party to a fraud or to the commission of any other tort is personally 250 liable to third parties; the fact that the company may also be liable does not affect this, so if, by order of the directors, a tortious act is committed, the directors who are parties to it are personally liable. Many obligations are imposed on companies under the Companies Acts, where the 251 directors themselves may be liable personally or collectively with the other directors when the company is in breach, e. g. if a company fails to file its annual returns, or if there are untrue statements or wilful non-disclosure in a prospectus, or on an irregular allotment where the director acted knowingly. Under the Companies Act 1963, if in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court can hold the directors personally liable for all of any of the debts or other liabilities of the company. Similarly directors may be liable for reckless trading. Reckless trading, fraudulent trading and facility to keep proper books of account are the 252 main areas wherein a director may become personally liable for the debts and liabilities of the company. cc)

Indemnity

It was normal at one time for articles to exempt directors from liability for any loss of 253 the company other than those incurred as a result of wilful default or actual dishonesty. However, the Companies Act 1963 provides that any such provision is to be void except in relation to liability incurred by the director in defending criminal or civil proceedings in which he succeeds or is acquitted, or in connection with an application under a particular section of the 1963 Act enabling the court to relieve any officer or auditor of the company from liability for any negligence, default, breach of duty or breach of trust, where the officer acted honestly and reasonably and it appears to the court that he ought fairly to be excused. A director may also be indemnified in relation to an application under the Companies (Amendment) Act 1983 where, in breach of that Act’s provisions against companies acquiring their own shares, a company’s share are issued to its nominees or they otherwise acquire such shares that are not fully paid. In such a case the company’s directors become liable to pay the outstanding amounts on the shares.

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254

Ireland

III. Limited Liability Company

dd) Compliance Statements

254 Section 45 of the Companies (Auditing and Accounting) Act 2003 will, when commenced, introduce new obligations on affected company directors to prepare a Compliance Policy Statement and an Annual Compliance Statement which is to be included in the Directors’ Report accompanying the company’s audited financial statements. All public limited companies (whether listed or not) and all private company’s whose balance sheet total for the year exceeds J 7.6 million or whose turnover exceeds J 15.23 million will be affected. Directors will be required to provide the following details in a Compliance Policy Statement: – its policies regarding compliance with its obligations under the Companies Acts, tax legislation and other “relevant obligations”; – its internal financial and other procedures for securing compliance with those relevant obligations; and – its arrangements for implementing and reviewing the effectiveness of the policies and procedures referred to above. 255 The Directors’ Compliance Statement must be in writing and submitted for approval by the board of directors. It must be reviewed at least once in every 3 year period following its approval by the board, and, if necessary, revised by the directors. ee)

Related Statement

256 Directors are further obliged to include in the directors’ report a statement: – acknowledging that they are responsible for securing the company’s compliance with its relevant obligations; – confirming that the company has internal financial and other procedures in place that are designed to secure compliance with its relevant obligations, or, if not specifying the reasons; – confirming that they have reviewed the effectiveness of the company’s procedures during the year or, if this is not the case, specify the reason for this, and – specifying whether, based on the company procedures and their review of those procedures, the directors are of the opinion that they used “all reasonable endeavours” to secure the company’s compliance with its relevant obligations or, if this is not the case, specify the reasons. d)

Other Representatives of Ltd

257 The Companies Act 1963 states that the term ‘officer’ includes a director or secretary. Every Irish registered company is required to have a secretary, who may be one of the directors. His functions are more administrative than managerial; he is normally the person responsible for ensuring that the company complies with the requirements of the various Companies Acts. 258 Usually the secretary is appointed by the members of the company or the directors. His name must be included in the statement required to be delivered to the Registrar of Companies with the memorandum and articles of association. A body corporate may be a secretary but not a director. 438

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7. Committee

7.

Committee

a)

Mandatory/Optional Committee

Ireland

259

As already stated above, the board of directors may not delegate powers to a committee 259 unless empowered to do so by the articles of association. Under the model articles of association in Table A, directors may delegate any of their 260 powers to committees consisting of such member or members of the board as they think fit. Committees are to be autonomous in the performance of their duties but they are required to perform such duties within the boundaries of any regulations imposed by the board. The most common committee is the Remuneration Committee which decides on the 261 remuneration of the directors. Also a company may have a Nomination Committee which determines the successors 262 of a former director. Under the Companies (Auditing and Accounting) Act 2003, each large Ltd shall 263 either: (a) establish an audit committee that: (i) has all or some of the responsibilities specified within the Act, and (ii) subject to certain exceptions, otherwise meets the requirements, or, (b) decide not to establish an audit committee. The Board of Directors of each large Ltd shall state in their annual directors’ report: 264 (a) whether the company has established an audit committee or decided not to do so; (b) if the company has established an audit committee, whether it has only some of the responsibilities specified within the Act; (c) if the company has decided not to establish an audit committee, the reasons for that decision. In this regards, a ‘large Ltd’ means either of the following: (a) a private company limited by shares that, in both the most recent financial year of the company and the immediately preceding financial year, meets the following criteria: (i) the balance sheet total of that company exceeds for the years: – J 25,000,000, or – such other amount as may be prescribed (ii) the amount of turnover of that company exceeds for the year: – J 50,000,000, or – such other amount as may be prescribed, or (b) a private company limited by shares if the company and all its subsidiary undertakings together, in both the most recent financial year of that company and the immediately preceding financial year, meet the criteria in (a) above. Paula Phelan

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265

266

b)

Ireland

III. Limited Liability Company

Composition and Responsibilities of the Committee

266 As the directors of a Ltd are not automatically entitled to be remunerated for their services, the board of directors usually have contracts for services or of employment which authorises payment to the directors. Also a Remuneration Committee may be set up to assess the remuneration. Alternatively, the directors leave the decision to be made at the general meeting of the company without utilising contracts or committees. 267 In relation to Audit Committees, subject to some specific requirements, the 2003 Act gives the board discretion to decide the membership of the audit committee. However, the committee must have at least two members and all the members must be qualifying directors under the terms of the 2003 Act. In general, all directors can be members of the audit committee unless they have been employees of the company or a subsidiary in the past three years. In addition, the chairman of the board cannot be on the audit committee. There are additional rules which may permit one director act as committee. c)

Qualifications

268 In general, qualification for appointment to a committee of a company is usually restricted to members of the board and determined at the discretion of the board. 269 A director qualifies for appointed to the Audit Committee unless he or she – (a) is, or was at any time during the 3 years preceding appointment to the committee(i) an employee of the company or undertaking concerned, or (ii) an employee of any subsidiary of the company concerned or of a subsidiary undertaking of the undertaking concerned, or (b) is the chairperson of the board of directors. 270 In general, qualification for appointment to a committee of a company is usually restricted to members of the board and determined at the discretion of the board. d)

Consultative/Advisory Council

271 There is no specific consultative or advisory council. However, it is common for Ltd to seek the services of consultants who are not officially employees of the company.

8.

Selected Capitalisation and Liability Questions Concerning the Ltd

a)

Reduction in Share Capital

272 Where a company decides that it wishes to reduce its share capital, it must abide by the Irish Companies Acts rules for company purchasing its own shares and providing financial assistance for the purchase of its own shares. 440

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8. Selected Capitalisation and Liability Questions Concerning the Ltd

Ireland

273

Notwithstanding general prohibitions on reducing share capital, there are exceptions 273 for a private company limited by shares or a private company limited by guarantee and having a share capital. The exceptions are: (i) authorised by articles of association to reduce share capital; and (ii) the company passes a special resolution approving the reduction; and (iii) the alteration is confirmed by the court. Reduction of capital can occur in the following situations: cancellation of paidup share 274 capital; paying off of any paid up share capital in excess of the company’s requirements and reduction of liability on share as regards share capital not paid up. b)

Capital-Substituting Loans

Directors of companies have special obligations in situations where a company’s money 275 is being used, directly or indirectly, to help fund a purchase of that company’s shares. In all such cases, the directors have to be aware of the provisions of section 60 of the 1963 Act. The law as of 1 July 2005 replaces the existing sub-sections (12) and (13) of Section 60 276 of the 1963 Act with two new sub-sections (12) and (13). The new sub-section (12), now lists a total of thirteen exceptions to the general prohibition on the giving by a company of financial assistance for the purpose of or in connection with the purchase or subscription of shares in it or in its holding company. These exceptions will have the effect of permitting transactions over which doubts were expressed in the past as to whether or not they constituted financial assistance. The following exceptions should be noted: – the “payment” by a company of a dividend or the making by it of any “distribution” out of profits, available for distribution, will not constitute financial assistance. – previous exceptions (i. e. the discharge of a liability carefully incurred; the lending of money in the ordinary course by a company; the provision by a company of money re employee share schemes and bona fide loans to employees) have been repeated in the new sub-section (12) and are respectively set out in paragraphs (b) (d) (e) and (f) thereof. – the provision of finance or delivery of security to refinance an existing loan or other liability (which had been previously given or provided on foot of a special resolution, passed in accordance with section 60 (2)), will not constitute financial assistance. Previously, it had always been interpreted, in practice, that refinancing of loans or other liabilities which had previously been given or provided by a company in compliance with section 60 had to be “whitewashed” under section 60. (The directors of private limited companies (but not plcs) have the option of using the so-called whitewash procedure to avoid the general prohibition in section 60. The whitewash procedure involves the shareholders of the company passing a special resolution (not more than 12 months before the financial assistance) approving the financial assistance.)

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277

Ireland

III. Limited Liability Company

– the making or giving by a company of representations, warranties or indemnities to a party in connection with a purchase or subscription for shares in the company or in its holding company will no longer constitute financial assistance. – the payment by a company of fees and expenses of the advisors of any subscriber for shares in the company or in its holding company and which are incurred in connection with that subscription will no longer be required to be “whitewashed”. – in connection with any allotment of shares by a company or its holding company, the payment by the company of commissions not exceeding 10 % of the money received in respect of such allotment to intermediaries and the payment by the company of professional fees, will no longer require to be “whitewashed”. 277 New sub-section (13) provides that a public limited company may, in accordance with paragraphs (d), (e) or (f) of new sub-section (12) give financial assistance to any person only if the company’s net assets (as defined in the sub-section) are not thereby reduced or, to the extent that those assets are thereby reduced, if the financial assistance is provided out of profits which are available for dividend c)

Obligation to Petition for Insolvency Proceedings

278 The obligation to petition for insolvency proceedings is determined by a special resolution of the Ltd to be wound up voluntarily or if at a general meeting the company resolves, due to its liabilities, that it cannot continue its business and that it be wound up voluntarily. 279 In – – –

general, the main categories of winding up are: a members’ voluntary winding up; or a creditors’ voluntary winding up. compulsory winding up by court order, otherwise known as a court liquidation.

9.

Accounting

a)

Book Keeping and Annual Financial Statements (Publication Obligations)

280 One of the most important duties imposed on directors by the Companies Acts is the duty to keep proper books of account. Section 202 of the 1990 Act provides that these books must correctly record and explain the transactions of the company and must enable the financial position of the company to be determined with reasonable accuracy at all times. 281 The books must be kept up to date by making entries in a timely manner and the books must be consistent from year to year. The books must give a true and fair view of the state of affairs of the company and must explain its transactions.

442

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9. Accounting

Ireland

282

Records must be kept for six years by both public and private companies. Under tax 282 legislation, records must be kept for six years from the end of the applicable year of assessment, and failure to comply results on conviction of the person responsible to a fine. The directors must prepare accounts each year to be presented to the shareholders at the 283 annual general meeting. The accounts must include a profit and loss account, a balance sheet, the auditors report, the directors’ report and any applicable group accounts. The accounts must contain specific types of information but overall must give a true and fair view of the state of affairs of the company. b)

Audit Requirements

Each year accounts must be audited by independent properly qualified auditors. To 284 ensure co-operation between directors and staff of the company and auditors, the 1990 Act imposes obligations on, among others, the directors. Section 197 imposes criminal liability on any director, secretary or employee who makes a false statement to the auditors. Section 197 goes on to make it an offence for any director or secretary, shadow director or employee to fail to provide the auditors of the company or the holding company of the company within 2 days of being required to do so with any information or explanations in respect of information within the knowledge or procurement of the officer or employee. The latter offence will not be committed if the officer or employee cannot get the information within the time of 2 days provided that the information is obtained as soon as practicable. Section 53(b) of the Companies (Auditing and Accounting) Act 2003 increases the 285 turnover threshold for an audit exempt company. The turnover threshold amount is now increased to J 1.5 million in respect of financial years commencing on or after 1 July 2004. The company must meet other criteria to claim this exemption, such as ensuring the company is not a parent or subsidiary of another company and it has filed its previous annual return and will file its current return on time in the Companies Registration Office. c)

Disclosure

Under section 191 of the 1963 Act the annual accounts must include the aggregate 286 amount of payments, pensions and compensation payments paid to directors. Any loans, quasi loans, credit transactions or guarantees to which a director or connected person is a party must also be disclosed. Details of a transaction or arrangement need not be included in the accounts if the 287 majority of directors (other than the director in question) conclude that the matter is not material, or if the matter is a contract of service or if the interest of the director arises only because he is a director of two companies. However disclosure must be made whether or not the transaction or arrangement is prohibited by section 31 of the 1990 Act, whether or not the person for whom it was made was a director or connected person when the transaction or arrangement was made, and whether or not the comPaula Phelan

443

288

Ireland

III. Limited Liability Company

pany was a subsidiary at the time of the transaction or arrangement if at any time during the accounting period it was a subsidiary. Where the total value of all transactions and arrangements which a director has with a company do not at any time during the accounting period exceed J 3,175 then details need not be disclosed.

10. Taxation 288 A company, irrespective of place of incorporation, is Irish tax resident if it is managed and controlled in Ireland (i. e. the meetings are held here as well as the major policy making decisions and agreements are signed here). A company incorporated in Ireland is treated as being tax resident unless: (i) the company or related company carries on a trade in Ireland and either the company is ultimately controlled by persons resident in EU member states or in countries with which Ireland has a tax treaty, or the company or a related company is a quoted company; or (ii) the company is regarded as non-resident in Ireland under a double tax treaty. 289 Irish tax resident companies are liable to pay corporation tax on worldwide income and capital gains (subject to appropriate double taxation relief). Corporation tax is payable by companies who are not tax resident in Ireland (i. e. non-resident companies) if trading occurs here through a branch or agency. Additionally, non-resident companies may become liable to Irish capital gains tax where gains arise on the disposal of certain specified assets not used a branch or agency. Non-resident companies which do not have a branch or agency but have income arising otherwise are liable to income tax (not corporation tax) on such non-trading income. a)

Corporation Tax

290 The standard rates of corporation tax may be summarised as follows: – trading Income from 1 January 2003 onwards is 12.5%; – non Trading Income from 1 January onwards is 25%. 291 The 25% rate applies to trading income from dealing in and developing land other than fully developed land. A 20 % rate can apply to trading income from dealing in residential land. 292 Trading losses and charges subject to the lower rate of tax may be offset against income other than that which is taxed at the lower rate on a “value and credit basis”. Manufacturing losses and charges can be used in a comparable fashion. 293 The effect of this is to give a credit against corporation tax payable for the value of the losses or charges. 294 10 % Corporation Tax – Manufacturing Relief The term manufacture is not defined although the legislation provides that certain activities are excluded e. g. preservation, pasteurisation, cutting, mixing etc. 444

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11. Dissolution of a Corporation/Termination of the Business

Ireland

295

A 10 % rate of corporation tax applies to manufacturing activities carried on in Ireland 295 until 31 December 2010 where the manufacturing trade was carried on prior to July 1998 or where the manufacturing trade was approved for grant assistance by the I. D. A. on / before 23 July 1998. For qualifying operations established since 23 July 1998, the 10 % rate applied until 31 296 December 2002 when the 12.5% rate came into force. b)

Accounting Periods for corporate tax

The period within which a company makes up its accounts generally may not exceed 12 297 months. c)

Allowable expenses and special reliefs

All business expenses of a revenue nature, apart from entertainment as part of the 298 company business are allowable. Depreciation and amortization charges are not permitted but are replaceable by special capital allowances. Restrictions however also apply on the amount of motor expenses that are deductible. This applies to capital allowances, leasing charges and running expenses. d)

Offsetting of losses against future liabilities

A tax loss may be offset against other income for the accounting period or the imme- 299 diately preceding accounting period or alternatively carried forward against future income from the same source, depending on the source of the income. Essentially this means that trading losses which are not used against income may be offset only against profits in the immediate accounting period or in relation to future trading profits. e)

Capital gains and losses

Companies pay corporation tax on capital gains at the standard capital gains tax rate is 300 20 %.

11. Dissolution of a Corporation/Termination of the Business a)

Winding Up

A company can be wound up if it is solvent or insolvent. A liquidator is appointed in 301 order to wind up the company. In accordance with the rules of the Companies Acts, the liquidator takes control of the company and, collects its assets, pays debts and makes distributions of any surplus to the members in conformity with their rights. Once the liquidation completes, the company is dissolved. A company can be wound up in two ways: (i) voluntary winding up by either the members or creditors; or Paula Phelan

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445

303

Ireland

III. Limited Liability Company

(ii) winding up by the court, which is a compulsory or court liquidation. 303 In the case of a court and creditor’s voluntary winding up, this usually occurs in cases of insolvency. A member voluntary winding up occurs when no insolvency arises. 304 A voluntary winding up can occur in the following instances: – the period or duration of the company as fixed by the articles of association expire, or an event occurs whereby the articles provide that on its happening the company will be wound up and a special resolution is passed by the company; – the company resolves by special resolution that it be wound up voluntary; – the company in general meeting resolves that it cannot, as a result of liabilities continue its business and therefore must be wound up voluntarily. b)

Receivership

305 A receiver may be appointed in a number of ways, the most common being where the receiver is appointed by a debenture holder on foot of a debenture. A receiver may also be pointed by order of the court and the Director of Corporate Enforcement now has a supervisory role in relation to receivers. 306 The powers of receivers derive from the debenture document. The appointment of a receiver does not mean that the company will cease to trade, once the receiver has completed his functions under the debenture, the role terminates and the company is free to resume business. 307 Generally the appointment of a receiver leads on to the appointment of a liquidator as a result of the company’s insolvency. c)

Examinership

308 The Companies (Amendment) Act 1990 as amended introduced a process allowing a company a period of protection from any actions by creditors thus allowing an examiner the opportunity to investigate the affairs of the company. The appointment of an examiner comes on foot of a petition to the High Court which can be brought by the company, its directors, creditors or member of the company who at the date of the petition hold at least one tenth of the paid up voting capital. The petition not only nominates an examiner but also provides evidence demonstrating that there is a “reasonable prospect of survival of the company and the whole or any part of its undertaking as a going concern”. It also contains a report from an independent accountant. d)

The European Insolvency Regulation

309 This Regulation came into force in May 2002. It offers a framework for common rules in relation to cross border insolvency proceedings, by providing collective insolvency proceedings for the appointment of a liquidator. The regulation does not apply to insurance undertakings, credit institutions or investment undertakings.

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Paula Phelan

Italy Mara Bolzoni

Table of Contents I.

Introduction

II. The Joint Stock Corporation (Spa) 1. Features of the Spa 2. Incorporation of an Spa a) Incorporation Procedure aa) Execution of the Incorporation Documents bb) The Memorandum of association cc) Requirements for Incorporation b) Registration procedure c) Pre-incorporation status d) Cost and Duration of the Incorporation procedure e) Nullity of the Spa f) Requested information on Business Letters 3. Spa with a sole shareholder 4. Separate funds 5. Contributions a) Contributions in cash b) Contributions in kind c) Purchases from promoters, founders, shareholders and directors d) Collateral performances 6. The Spa-share a) Special classes of shares aa) Preferred shares bb) Saving shares cc) Employee profit shares b) Transfer of shares c) Pledge, usufruct, attachment of shares d) Own shares e) Acquisition of shares by controlled companies 7. The Shareholder a) Rights and Duties of a Shareholder

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449 449 449 450 450 450 451 452 453 453

b) c) d) e) 8. a) b) c) 9. a) b) c)

454 454 455 455 456 457 458 458 459 459 460 460 461 461 461 461 462 463 464 465 465

d) e) 10. a) 11. 12. 13. a) b) 14. 15.

Shareholders’ Meetings Annullability of resolutions Nullity of resolutions Shareholders’ agreements The memorandum of association Amendments to the memorandum and articles of association Capital Increase/Reduction Shareholders’ right of withdrawal Management Directors Management and Representation Liability of directors aa) Liability to the company bb) Liability to company creditors cc) Liability to single shareholders or third persons Chief executive officers Other representatives of an Spa Board of Statutory Auditors Liability of statutory auditors External auditors Alternative systems of corporate governance Company books and Accounting Company books The Balance Sheet Taxation Termination of the business

466 469 470 471 471 471 472 474 476 476 478 479 479 480 480 480 480 480 482 482 483 484 484 485 487 487

III. Partnership Limited by Shares

(Sapa) 1. 2.

Features of the Sapa Special provisions applicable to Sapas

IV. Limited Liability Company (Srl) 1.

Features of the Srl

489 489 489 490 490

447

Italy 2. Incorporation of an Srl a) Pre-incorporation status b) Cost and Duration of the Formation procedure c) Nullity of the Srl 3. Srl with a sole quota-holder 4. Contributions a) Contributions in cash b) Contributions in kind c) Contributions consisting in the performance of services d) Purchases from promoters, founders, shareholders and directors 5. Quota-holders’ loans 6. The Srl participation a) Transfer of quotas b) Pledge, usufruct, attachment of quotas c) Operations of the company on its own quotas

Index 491 492 492 492 492 493 493 493 494 494 494 495 495

7. a) b) 8. a) b) c) 9. a) b) 10.

Quota-holders’ decisions 496 Quota-holders’ meetings 496 Invalidity of resolutions 497 The memorandum of association 498 Amendments to the memorandum and articles of association 498 Capital Increase/Reduction 498 Quota-holders’ right of withdrawal 499 Directors 501 Management and Representation 501 Liability of directors 502 Board of Statutory Auditors and External Auditors 502 Company books and Accounting 502 Company books 502 The Balance Sheet 503 Taxation 503 Termination of the business 503

495

11. a) b) 12. 13.

496

V. Branches of foreign companies

503

Index Accounting control 201, 204, 205, 208, 213, 243 Accounting criteria 209 Amministratori delegati 179 Appointment of directors 171, 294 Assemblea dei soci 121 Assemblea ordinaria 123 Assemblea speciale 129 Assemblea straordinaria 123 Atto costitutivo 9 Balance sheet in abbreviated form 214 Capital increase with consideration 154, 280 Capital increase without consideration 154, 281 Capital reduction 156-158, 282-284 Collegio sindacale 121 Comitato esecutivo 179 Comitato per il controllo sulla gestione 205 Consiglio di amministrazione 121 Consiglio di gestione 204 Consiglio di sorveglianza 204 Consolidating annual accounts 210

448

Controlled companies 113 Consent-provisions 98, 260, 261 Consob 96, 201 Cooptazione 173 Declaration of nullity 44-50 Direct establishment 10 Dualistic system 6, 167, 204 IRAP 216 IRES 216 Legislative decree 5/2003 1, 2 Legislative decree 6/2003 1, 2, 3 Legislative decree 344/2003 216 Liquidators 219-222 Minimum Capital Spa 26 Minimum capital Srl 239 Monistic system 6, 122, 167, 205 Official Gazette 130 Ordinary shareholders’ meeting 133 Performance of services 240, 249, 253 Potere di rappresentanza 169 Potere gestorio 169 Pre-emption provisions 98, 260

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1. Features of the Spa Presidente del Consiglio di Amministrazione 178 Public subscription 10 Purchase by the company 80 Register of Enterprises 33 Shares certificates 4, 39, 83, 93, 162 Shelf companies 7

I.

1

Italy Sindacati di voto 146 Sindacati di blocco 146 Statuto 9 Special meeting 133 Transparency taxation 218 Unilateral deed 9, 29, 55, 75, 235, 239, 249 VAT 217

Introduction

In January 2004 the legislative decrees 5/2003 and 6/2003 entered into force, introdu- 1 cing substantial changes in the Italian system of company law as set out in the Civil Code of 1942, in particular providing for a more flexible framework for the internal working of Italian companies and a broader scope for its adaptation to different preferences and needs. While Decree 5/2003 contains new provisions concerning corporate litigation and 2 arbitration, and introduces several novelties which are expected to be later embodied in a global reform of Italian civil procedure, Decree 6/2003 has radically reformed the structure of corporate entities and the substantial rules applicable thereto. The latter represents the first wholesale review of Italian corporate governance rules in 3 60 years. A first move in that direction was made with Legislative Decree n. 58/1998 (the so called Legge Draghi, that applies only to listed and other “public” companies), which contained limited corporate governance provisions along with other regulations affecting capital markets and financial products. This work examines the new regulations concerning capital companies in general, and aimes at providing foreign jurists and company law practitioners with an introductive overview of the current, postreform, Italian system of corporate law.

II. The Joint Stock Corporation (Spa) 1.

Features of the Spa

The Italian Civil Code outlines the two main characteristics of the corporate form 4 “Spa” (societa` per azioni): a) in an Spa, only the company is liable, with its assets for company obligations (art. 2325, I co.), that is to say that the liability of its members is limited to the value of their subscriptions; b) the participation in the capital of an Spa is represented by shares (art. 2346, I co.), which can be embodied in share certificates. While the first element differentiates the Spa from the Sapa (societa` in accomandita per azioni), a corporate entity where one or more members are jointly and severally liable for company obligations, the second one differentiates the Spa from the Srl (societa` a responsabilita` limitata), a corporate entity where participation in the capital is represenMara Bolzoni

449

5

Italy

II. The Joint Stock Corporation (Spa)

ted by “quotas”, which cannot be embodied in share certificates or other negotiable instruments. 5 The Spa is the most important corporate entity in the Italian economic context, as it is adopted by the majority of large and medium-large undertakings, both private and statecontrolled, but also by several smaller businesses. Another peculiarity of this corporate form is that only Spas can be admitted to the Italian Stock Exchange, once certain requirements are fulfilled. Special rules for Spas listed on the stock exchange are set out in Legislative Decree n. 58/1998. Nevertheless, it is worth mentioning that the vast majority of existing Spas are not listed on the Italian or other stock exchanges. 6 As far as the structure of an Spa is concerned, following the reform of Italian company law aimed at granting more flexibility in the articles of association, shareholders can choose between three different corporate governance systems: the traditional system, the so-called “dualistic system” and the “monistic system”.

2.

Incorporation of an Spa

7 Availability of shelf companies is not widespread in Italy, as Italian companies are required to comply with certain requirements irrespective of whether they actually carry out any business or not. 8 The establishment of an Spa requires two essential steps: a) the execution of the memorandum of association; and b) the registration in the Register of Enterprises. a)

Incorporation Procedure

aa)

Execution of the Incorporation Documents

9 The initial step to form an Spa is the execution of the memorandum of association (Atto costitutivo, deed of incorporation) and of the articles of association (Statuto, by-laws) in the form of a public deed, before a notary public. As a result of the reform of Italian company law, an Spa may now be incorporated either by contract or by unilateral deed. 10 The execution of the memorandum of association in a case of a plurality of shareholders can be performed following two different procedures: a) the direct establishment; and b) the establishment through public subscription. In the event the company is directly established, the founding shareholders immediately execute the memorandum of association and underwrite the entire issued capital of the company. The establishment through public subscription is more complicate, and the execution of the memorandum of association is only the final step of a procedure aimed at raising the initial capital of the company among the public or a number of invitees on the basis of a program drafted by the promoters, which shall indicate the main features and details of the future company, such as the object, the capital, and the main provisions of the memorandum of association and the articles of association. Since the raising of additional capital is a much more straightforward process once the company has already been established, establishment of new companies through public subscription is very rarely adopted. 450

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2. Incorporation of an Spa

Italy

11

bb) The Memorandum of association

Pursuant to art. 2328 of the Italian civil code the following provisions are mandatory in 11 the memorandum of association: 1) The details of the shareholders and of the promoters, if any, as well as the number of 12 shares subscribed by each of them. 2) The name of the company and the municipality where the registered office of the company 13 is located and the braches, if any. The name of the company can be freely chosen (at least as far as company law is concerned), but it must include the indication that the company is an Spa, pursuant to article 2326 of the civil code. The registered office is in principle the place where the managing body of the company and its administrative offices are located, and is anyway its official address. The choice of the registered office determines the competent Office of the Register of enterprises where the company shall be registered. 3) The ‘‘corporate objects’’, that is to say the business purpose of the company. Such 14 purpose may be very broad or complex, but, as a result of the reform of the Italian company law, the degree of vagueness which may be acceptable has been further reduced, so that formulas as “to carry out any business whatsoever” are not acceptable. 4) The amount of the subscribed and paid-up capital.

15

5) The number and the face, or ‘‘nominal’’, value, if any, of the issued shares, their 16 characteristics and their modality of issue and circulation. 6) The value attributed to the credits and of the assets contributed in kind, if any.

17

7) The rules concerning the distribution of profits among the shareholders. This provision is 18 not mandatory. In fact, in case of lack of such a provision in the memorandum of association, the general discipline provided for by the civil code applies. 8) The special benefits, if any, granted to the promoters and founders of the company. The 19 promoters can only reserve for themselves in the memorandum of association a participation not exceeding one-tenth of the net profits for a maximum period of five years. The founders can also reserve for themselves other kinds of benefits as there are no explicit provisions to the contrary in the Civil Code. 9) The system of corporate governance adopted, the number of directors and their powers, 20 indicating those who are the legal representatives of the company. 10) The number of statutory auditors.

21

11) The appointment of the first directors and statutory auditors and, when provided, of the 22 auditor who will take care of the accounting supervision. 12) The total amount of the incorporation costs by which the company is charged. Mara Bolzoni

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II. The Joint Stock Corporation (Spa)

24 13) The duration of the company or, in case of a company of unlimited duration, the withdrawal terms. 25 Most of the these mandatory provisions can indifferently be contained in the memorandum of association or in the articles of association. In fact, article 2328 of the civil code states that the articles of association containing rules for the functioning of the company, even if set out in a separate document, are considered to be an integral part of the memorandum of association. In case of discrepancies, the articles of association will prevail. cc)

Requirements for Incorporation

26 As from 1 January 2004, the minimum capital of an Spa is Euro 120,000,00, unless special laws do not require a higher minimum capital, as it is the case with, e.g., banks and other financial institutions. 27 In order to incorporate an Spa it is also necessary that the following conditions, which are set out in article 2329 of the civil code, be fulfilled. 28 a) The capital of the company must be fully subscribed by the original shareholders. The subscription consists of a declaration or undertaking to contribute to the company the corresponding value of the shares subscribed. 29 b) The provisions set out in the articles 2342 and 2343 of the civil code on contributions must bee complied with. In particular, prior to execution of the memorandum of association, at least twenty five per cent of the contributions in cash or, in the event of incorporation by unilateral deed, their full amount, must be deposited in the bank account of the new company and may be utilised immediately after the formation for the payment of everyday or formation expenses. As far as the contributions in kind or represented by claims are concerned, their value must be determined by a sworn report of an expert designated by the president of the competent court, following the procedure described in article 2343, which also grants the directors of the company the faculty of revise the appraisal of the expert. 30 c) The authorisations and the other conditions which are set out in special laws with reference to Spas with a particular business purpose are must be met. 31 The notary public, prior to formation, has to verify that the aforementioned legal requirements be met and, in general, that the future company is compliant with Italian law requirements. This means that, if the memorandum of association or the articles of associations contained provisions that be contrary to the Italian public order or the standards of decency, the notary public should refuse to execute it. 32 The signing of the memorandum and the articles of association by proxy is possible; however, a notarised power of attorney is necessary. If the power of attorney is granted abroad, the notarial deed must also be legalised. The execution abroad of the documents pertaining to the incorporation of an Spa is not currently possible.

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Mara Bolzoni

2. Incorporation of an Spa

b)

Italy

33

Registration procedure

The notary public who has assisted in the execution of the memorandum of association 33 must file it with the competent office of the Register of enterprises, that is to say the office within whose district the company has its registered offices, and request its registration. Also the documents giving evidence of the existence of all the legal requirements for the incorporation of the company have to be filed. If the notary public or the directors do not request the registration of the company within twenty days from the execution of the memorandum of association, any shareholder can request the said registration at the expenses of the company. Having verified the formal regularity of the documentation filed with, the office of the 34 Register of enterprises provides for the registration of the company. As from 1 January 2004, the companies which exercise the activity of direction and 35 coordination on other companies, that is to say the controlling companies, as well as the companies which are subject to such activities, that is to say the controlled ones, shall also appear in the newly established special section of the Register of enterprises. c)

Pre-incorporation status

Only once the Spa is registered in the Register of enterprises it becomes a full-fledged 36 corporate entity. It may happen, however, that in the period between the execution of the memorandum 37 of association and the registration of the company, some transactions are entered into the name of the company. In this respect, the civil code provides that the persons (e.g. founders and managing directors) acting in the name of the company before its registration are unlimitedly, jointly and severally liable towards the contracting third parties with the company itself. Following the reform of company law, also the sole founder and those among the shareholders who have authorised or consented to the transaction are jointly and severally liable with the company, without limit. After the incorporation procedure has been completed, the company becomes liable 38 also for the transactions that were necessary for its incorporation. As a result, the Spa becomes liable towards the notary public for his fees and expenses arising from the execution of the memorandum of association and the registration of the company. As far as the transactions that were not strictly necessary for the company formation, the Spa becomes liable for them only upon their specific approval. Even in the case of approval, those who acted in the name of the company remain liable towards the third parties. Prior to the registration of the Spa in the Register of Enterprises, share certificates 39 cannot be issued and the shares cannot be the object of solicitation of investment.

Mara Bolzoni

453

40

Italy

d)

Cost and Duration of the Incorporation procedure

II. The Joint Stock Corporation (Spa)

40 The costs involved in the formation procedure can be summarised as follows: a) fees of the notary public, which amount approximately to Euro 4,000,00; b) fees for the entry in the Register of enterprises, currently equal to Euro 119,00; c) registration tax, in the amount of Euro 373,00; d) issue of a VAT number for the company: Euro 310,00. 41 As far as the fees of the lawyers or other professionals (e.g. accountants) involved in the formation procedure are concerned, they may vary depending on the structure of the company and the complexity of the memorandum and articles of association. 42 It is quite difficult to foresee the duration of the formation process, which on the other hand widely varies depending on the chosen place of formation. However, it will take at least four-six weeks before the Spa is fully operational. e)

Nullity of the Spa

43 The formation procedure of an Spa and in particular the memorandum of association may be affected by formal as well as substantial vices. 44 The consequences are remarkably different depending on the moment the vices are ascertained. In fact, while prior to registration of the company the memorandum and articles of association are subject to the general rules on the nullity and annullement of contracts, once the registration of the Spa in the Register of Enterprises has taken place, a declaration of nullity of the company can be rendered only in the following cases set out in article 2332 of the civil code: 45 a) the memorandum of association has not been stipulated in the form of a public deed; 46 b) the business purpose of the company is illegal; 47 c) the articles of association do not provide any information regarding the name of the company, or the contributions, or the amount of the subscribed capital, or the business purpose of the company. 48 The sensible limitation of the cases of nullity of an Spa after its registration is justified by the necessity of protecting the interests of third parties who may have gone through transactions with the company and by the general interest in preserving the existing structure of the company. 49 Following a declaration of nullity of a registered Spa, liquidators are appointed by the court and a winding-up procedure is commenced. 50 A declaration of nullity does not affect the transactions made in the name of the company after its registration in the Register of Enterprises and, as a consequence,

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Italy

51

shareholders are not released from their duty to pay their contributions until the creditors of the company are satisfied. Article 2332 of the civil code also provides that the nullity of an Spa cannot be declared 51 if its causes have been removed through an amendment of the memorandum or articles of association entered in the Register of Enterprises. f)

Requested information on Business Letters

The records and the business letters of an Spa must show the following data: a) company name; b) registered seat of the company; c) the office of the Register of Enterprises with which the company is registered and registration number; d) the capital of the company, in accordance with the amount actually paid up and shown to exist in the last annual accounts.

52

After the dissolution of the company, the fact that the company is under liquidation 53 procedure shall be expressly stated in its records and correspondence. As a result of the reform of corporate law, the company shall also indicate in its acts and 54 correspondence to be subject to the activity of coordination and direction of another company.

3.

Spa with a sole shareholder

As mentioned in chapter 2, as a result of the reform of Italian company law, an Spa may 55 now be incorporated either by contract or by unilateral deed. Before the reform came into force, the Italian civil code stated the nullity of a capital 56 company incorporated by a sole shareholder and, in case of subsequent failure of the plurality of shareholders, provided for the unlimited liability of the sole shareholder if the company became insolvent. In 1993, a decree enacting the XII EEC on the harmonisation of company law made it 57 possible for Srl to be incorporated by a sole shareholder. The recent reform of Italian company law has finally introduced the same possibility for an Spa. Special rules apply to an Spa with a sole shareholder.

58

In principle, also in an unipersonal Spa only the company is liable with its assets for 59 company obligations, that is to say that the liability of its sole member is limited to the value of his subscription. Nevertheless, the civil code provides some precautions in order to protect the interests of third contracting parties as well as for some exceptions to the limited liability of the sole shareholder.

Mara Bolzoni

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II. The Joint Stock Corporation (Spa)

60 Article 2331 states that the sole founder is always jointly and unlimitedly liable together with the persons that acted in the name of the company before its registration in the Register of Enterprises. 61 A more stringent discipline applies as far as contributions are concerned. In fact, both at the time of formation of the company and of increase of share capital, the sole shareholder must immediately pay the entire subscribed capital. In case of failure of the plurality of shareholders during the life of the company, payments still due must be made within ninety days. Should the sole shareholder not comply with these provisions, the principle of limited liability would not apply. 62 Also transparency rules apply to unipersonal Spa. In fact, the documents and correspondence of the company must indicate that the company has one member only. Besides, the directors of the company must file with the Register of Enterprises a declaration containing the details (name and surname or company name, date and place of birth or of incorporation, domicile or registered seat and citizenship) of the sole shareholder within thirty days. Until the above information are not provided to the Register of Enterprises, the sole shareholder is unlimitedly liable for the company obligations. 63 A special discipline also applies to contracts and transactions between the company and its sole shareholder, to the purpose of protecting the interests of the creditors of the company. In this respect, article 2362 of the civil code provides that the contracts stipulated between the company and the sole shareholder or the transactions in favour of the sole shareholder are valid towards creditors of the company only if they result from the book of the minutes of the board of directors or from a document having a certified date preceding the attachment of the company assets by the creditors. Also a company being the sole shareholder of an Spa profits from the limited liability regime.

4.

Separate funds

64 As from 1 January 2004, Spas can create separate funds dedicated to specific business activities which are only liable for the obligations pertaining to that business. This new technique represents an alternative to the creation of different companies in order to limit the business risk. 65 According to article 2447-bis of the civil code, two options are available: 66 a) the Spa can create one or more funds, composed of business assets, each of which is allocated to a specific business activity; the described separate funds cannot be established in an aggregate amount exceeding 10 per cent of the net assets of the company and in any case cannot be established for the exercise of business pertaining to activities reserved by special legislation; 67 b) the company can enter into finacing agreements with third parties who have a specific business activity, and agree that all or part of the cash flows generated 456

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68

from such specific business activity shall be allocated in priority to the repayment of all or part of such financing. To create separate funds, a resolution of the Board of Directors (or of the Management 68 Board, depending on the corporate governance model adopted by the Spa) is required. Article 2447-ter of the civil code provides for the information that the resolution must set out in order to identify the specific business, the company assets, and the obligations related to it. An audit firm must be appointed for the auditing on the performance of the specific business activity when the company is not subject to audit and issues financial instruments related to the separate funds widely distributed among the public and offered to non professional investors. The resolution which creates a separate fund shall be drawn up by a notary public and 69 filed with the Register of Enterprises. In the subsequent sixty days, creditors prior to the filing of such a resolution with the Register of Enterprises may apply to the competent court for an order preventing the creation of the separate fund. Nevertheless, the court may order that the resolution be implemented, subject to the company providing adequate guarantees. After the sixty-day period has elapsed, the separation of the fund from the other assets of the company becomes effective. As a consequence, the creditors of the company will not be allowed to assert any claim against the assets the fund is composed of nor against the income arising from the specific business activity. A separate set of books and accounts must be kept. As far as the second option available, in order to create a separate fund, article 2447- 70 decies provides for the essential elements which a financing agreement must contain. Among the others, such agreement shall contain a detailed description of the transaction, the timing and the framework for its implementation; the extent to which the lender may control the transaction; the portion of the revenues allocated to the repayment of the financing and the method for determining that amount; any guarantees given by the company in respect to the repayment of any part of the financing; the final maturity date, following which no further amounts will be due to the lender. Copy of the agreement must be filed with the Register of Enterprises. Besides, the Spa must adopt collections and accounting systems such that the revenues of the business activity may be separately identified. Only in case of bankruptcy of the company prior to the final maturity date, the lender will have the right to recover his debt on all the assets of the company.

5.

Contributions

The share capital of the company is formed by the contributions of each shareholder. 71 The main function of contributions consists in providing the company with the initial resources to start the business activity. The total monetary value of contributions, as indicated in the memorandum of association, corresponds to the nominal capital of the company. The rules set out in the civil code with regard to contributions have the aim of granting their effective acquisition of contributions by the company and their correct evaluation. Mara Bolzoni

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II. The Joint Stock Corporation (Spa)

72 Two kinds of contributions in an Spa are possible: 1) contributions in cash; 2) contributions in kind. 73 In an Spa, contributions consisting in the performance of work or services are not admitted. a)

Contributions in cash

74 Unless otherwise provided in the memorandum and articles of association, contributions shall be made in cash. 75 As already mentioned in the preceding chapters, prior to execution of the memorandum of association, at least twenty five per cent of the contributions in cash or, in the event of incorporation by unilateral deed, their full amount, must be deposited with the bank account of the new company and may be utilised immediately after the formation for the payment of everyday or formation expenses. Once the company has been formed, directors can claim for the contributions still due and shall not wait until the initial date set out in the memorandum of association, if any, has elapsed. 76 Shareholders who are in default of payment cannot exercise their right to vote. In case of failure of payment by a shareholder, article 2344 of the civil code provides that directors can decide whether to start an action for the enforcement of the contribution or to directly offer the shares to the other shareholders in proportion with their shareholding for a price not lower than contributions still due. In the absence of offers, directors are entitled to have the shares sold on behalf and at the risk of the shareholder, through a bank or intermediary authorised to operate on the regulated markets. If the shares cannot be sold on the market, directors can declare the dismissal of the shareholder and retain the sums already collected from him. If the shares cannot be sold within the fiscal year during which the dismissal is pronounced, they shall be cancelled and a corresponding reduction of the capital of the company must take place. b)

Contributions in kind

77 As already mentioned in the preceding chapters, the shares corresponding to contributions in kind or represented by assignment of claims must be fully paid upon subscriptions. 78 The value of such contributions must be determined by a sworn report of an expert designated by the president of the competent court, following the procedure described in article 2343 of the civil code. The expert shall draft a report containing the descriptions of the property or claims contributed and the criteria followed in the evaluation process. The report shall be attached to the memorandum of association. The directors have six months from the formation of the company to revise the above mentioned report and, if deemed necessary, revise the appraisal. If, as a result of such revision, the value of the property or claims contributed is lower by more the twenty per cent than the value for which the contributions were made, the company shall reduce its capital 458

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79

proportionally. The shareholder is given the possibility to deposit the difference in cash or resign from the company. The aim of this complex procedure is to grant an objective evaluation of the property or claims contributed. c)

Purchases from promoters, founders, shareholders and directors

The above described evaluation procedure could be easily avoided in the past by 79 simulating a sale contract between a shareholder, who has formally undertaken to contribute cash, and the company. In fact, upon transfer of title, no price was paid by the company thanks to set-off with the outstanding amount due by the seller /shareholder for his contributions. In order to prevent such operations, article 2343-bis of the civil code, introduced in 80 1986, provides for special rules to apply to purchases by the company from promoters, founders, shareholders and directors that: a) have a consideration equal to or higher than one tenth of the capital of the company; b) are performed within two years form the filing of the company with the Register of Enterprises. In these cases, the seller shall submit a sworn report of an expert designated by the president of the competent court containing a description of each item of property or claims, the value attributed to each of them, the criteria of evaluation applied, and a declaration that such value is not lower than the consideration agreed for the purchase. The report shall be lodged with the registered seat of the company in the fifteen days preceding the shareholders’ meeting which shall be called in order to approve the transaction. Within thirty days from the authorisation, the minutes of the shareholders’ meeting together with the sworn report shall be filed by the directors with the Register of Enterprises. If this procedure is not complied with, the directors of the company as well as the transferor are jointly liable for damages caused to the company, to the shareholders, or to third persons. The provisions set out in article 2343-bis do not apply to the transactions which are 81 performed upon normal conditions in the current business of the company or those that occur in the stock exchange or under the supervision of the judicial or administrative authorities. d)

Collateral performances

As mentioned above, in an Spa, contributions consisting of performance of work or 82 services are not admitted. Nevertheless, the memorandum of association can impose on the shareholders, in addition to the duty of contributions, the duty of collateral performances other than in money, such as, for example, performances represented by work or services to be rendered in favour of the company. The memorandum of association shall specify the nature of the collateral performance, its duration and the remuneration of the shareholders, if any, and provide for special sanctions for non-performance. The relevant shares are not transferable without the consent of the directors.

Mara Bolzoni

459

83

Italy

6.

The Spa-share

II. The Joint Stock Corporation (Spa)

83 As already mentioned, the equity capital of an Spa is divided into shares of equal value. Pursuant to the changes introduced by the reform of the Italian corporate law, the issue of share certificates is now optional. In fact, article 2346 of the civil code states that, unless otherwise provided by the special legislation, the memorandum of association can exclude the issue of certificates or provide for different forms of legitimation and circulation of the shares. 84 Moreover, from 1 January 2004, shares can now be issued without a nominal value. In this respect, the above mentioned article states that, if the memorandum of association does not provide for a nominal value, the relevant provisions as to the rights and obligations of the shareholders depend on the number of shares held in proportion to the aggregate of shares issued. 85 Each share gives administrative and economic rights. In this respect, one of the main characteristics of shares is that they give equal rights to their holders, as expressly stated by article 2348 of the civil code. This rule is however only relative: in fact, the memorandum of association may create categories of shares carrying different rights. The company may, within certain limits imposed by law, freely determine the characteristics of the different classes of shares. a)

Special classes of shares

86 As above mentioned, it is possible to have categories of shares carrying different rights compared to the typical rights carried by ordinary shares and provided for by the law. Classes of shares other than ordinary shares can be originally created by the memorandum of association or as a result of its subsequent amendments by a special shareholders’ meeting. 87 The existence of special classes of shares within a company determines a different internal organisation depending on the fact that different categories of shareholders with different interests exist. In this respect, article 2376 of the civil code provides that in case of different classes of shares or of financial instruments which grant administrative rights, the resolution of the general shareholders’ meeting which affect the rights of one of them shall also be approved by a particular meeting of the shareholders belonging to the class concerned. These particular meetings are governed by the rules applicable to special meetings. 88 There are special classes of shares whose characteristics are expressly provided for by the civil code. However, as a general principle, the company may, within certain limits imposed by law, freely determine the characteristics of the special classes of shares. The most relevant limit is represented by the prohibition of issuing shares carrying multiple voting rights, according to article 2351 of the civil code. As a result of the recent reform of Italian corporate law, many of the these limits have been removed. For instance, all capital companies can now issue shares without voting rights while in the past this possibility was only given to listed Spas. 460

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6. The Spa-share

Italy

89

The aforementioned article provides that it is possible for an Spa (but also for the other 89 capital companies) to create shares without the voting rights, with voting rights limited to specific matters, with voting right subordinated to the performance of certain conditions not merely dependent on the willing of the shareholder. The value of these shares cannot be higher than one half of the capital of the company. Besides, the civil code provides that the memorandum of association of close companies (that is to say, companies which do not make recourse to the market of risk capital) may establish that the voting rights pertaining to the shares held by a single shareholder be limited to a maximum amount. Now it is also possible for a company to issue shares whose economic rights are related to the results of a specific sector of the business activity. aa)

Preferred shares

Preferred shares grant their holders particular economic benefits, such as a preference at 90 the moment of the distribution of dividends and/or the paying-off of capital at the winding-up of the company. The memorandum of association can freely determine the economic rights of this class of share, provided that the limit set out in article 2265 of the civil code is respected. The mentioned article, which applies to all kinds of companies, states that an agreement which establishes that one or more members are excluded from any participation in the profits or losses of the company is void. bb) Saving shares

Saving shares (azioni di risparmio) can only be issued by Spas listed on the Stock 91 Exchange. The characteristics of this special class of shares are set out in Legislative Decree n. 59/1998 which is the special law governing listed companies. Such shares have no voting right but shall be provided with economic benefits that can be related either to the distribution of profits or the apportionment of losses. Another peculiarity of saving shares is that they can be issued as bearer shares. cc)

Employee profit shares

An Spa may decide, if so provided in the memorandum of association, to distribute 92 profits to the employees of the company or of subsidiaries by means of the issue without consideration of special shares to the employees in an amount corresponding to such profits. The capital must be increased in proportion. b)

Transfer of shares

Shares are commonly represented by share certificates, which allow their transfer ac- 93 cording to the rules of circulation of negotiable instruments. Legal title to shares represented by share certificates can be transferred in two ways: 94 1) by authenticated endorsement of the share certificate made by a notary public or other subject as provided by the special laws (such as a stockbroker) and subsequent registration of the transfer in the Shareholders’ Book; 2) by double registration, on the share certificate and in the Shareholders’ Book, performed by the directors of the company.

Mara Bolzoni

461

95

Italy

II. The Joint Stock Corporation (Spa)

95 Nevertheless, as a result of the reform of corporate law, the memorandum of association of non listed Spas can now exclude the issue of share certificates. In such a case, the transfer of shares can be simply effected by entering the name of the transferor and of the transferee in the shareholders’ book. 96 Companies listed on the Stock Exchange cannot issue share certificates. In such a case, the transfer of shares is performed through an electronic system of centralised administration on the basis of the principles outlined by CONSOB, the public authority responsible for regulating the Italian securities market. 97 Finally, bearer shares are transferred with the delivery of the certificate. 98 The transfer of shares may be limited by pre-emption provisions (clausole di prelazione) or consent provisions (clausole di gradimento) contained in the memorandum or articles of association, which can also impose other restrictions such as an obligation not to sell the shares for a period of up to five years as from the formation of the company or the introduction of the restriction. As far as consent provisions are concerned, article 2355bis of the civil code states that the provisions which subordinate the transfer of the shares to the mere agreement of the social bodies or of other shareholders are ineffective if they do not contemplate an obligation of the company or of the other shareholders to purchase or the right of withdrawal of the seller. These provisions also apply in case of clauses which subordinate the transfer of shares as a consequence of death to particular conditions, unless the consent is obtained. c)

Pledge, usufruct, attachment of shares

99 Article 2352 of the civil code contains a detailed discipline concerning shares subject to pledge, usufruct, attachment or seizure. 100 As far as the right to vote is concerned, in case of pledge or usufruct of shares, the right to vote belongs to the pledge or the usufructuary, unless otherwise agreed. In case of seizure of shares, the right to vote belongs to the custodian. 101 If the shares give a right of option on newly issued shares, such right belongs to the shareholder, who shall provide at least three days before the expiration date for the payments of the sums necessary to exercise the right of option. Otherwise, the right of option shall be sold on behalf of the shareholder. 102 In case of increase of capital by transfer of reserves to capital, the pledge, the usufruct or the attachment extends to the newly issued shares. 103 The same article expressly provides who shall proceed with payments on the shares, if required.

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6. The Spa-share

d)

Italy

104

Own shares

Operations of the company on its own shares may always present some profile of risk as 104 to the integrity of the capital of the company, the correct functioning of the corporate governance, the market of securities. For all these reasons, operations of the company on its own shares, also performed 105 through a fiduciary company or an intermediary, are considered with great disfavor by the law, which provides a strict discipline with several limits. In fact, article 2357 of the civil code provides that a company can purchase its own shares only a) if they are fully paid; b) for a consideration not exceeding the amount of the distributable profits and the available reserves. A special procedure has to be followed. The purchase must be authorized by the shareholders’ meeting, which establishes the main characteristics of the transaction, such as the maximum number of shares to be purchased, the period of time for which the authorization is valid, the minimum and the maximum price of the purchase. Besides, the nominal value of the shares purchased according to the preceding rules, together with the shares held by subsidiaries, cannot exceed one tenth of the capital of the company. In case of breach of the aforementioned provisions, the own shares in excess must be 106 sold by the company in accordance with the procedure to be outlined by the shareholders’ meeting, within one year from their purchase. Otherwise, the own shares must be cancelled and the capital of the company proportionally reduced. There are special cases of purchase of own shares which are not subject to the general 107 provisions of article 2357 of the civil code. The limitations above described do not apply when the purchase takes place: a) in accordance with a resolution of the shareholders’ meeting to reduce the capital of the company by means of redemption and cancellation of shares; b) on a gratuitous basis, provided that the shares are fully paid up; c) as a result of a universal succession or a merger or a spin-off; d) as a result of the satisfaction of a claim of the company, provided that the shares are fully paid up. In these special cases, if the nominal value of the shares exceeds one tenth of the capital of the company, the own shares in excess must be sold by the company within three years. Any transaction concerning the own shares of the company must be authorized by the 108 shareholders’ meeting, which must outline the main procedural rules to be followed by directors. As long as the shares are owned by the company, the right to dividends and the right of 109 option are proportionally attributed to the other shares. As a result of the reform of company law which came into force in 2004, the shareholders’ meeting can authorize the exercise by the company of the right of option pertaining to its own shares, provided that the shares to be purchased are fully paid and that the consideration does not exceed Mara Bolzoni

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Italy

II. The Joint Stock Corporation (Spa)

the amount of the distributable profits and the available reserves. The voting rights are suspended. A legal reserve equal to the amount of the shares owned by the company must be established and maintained until the shares are not transferred or cancelled. 110 The company cannot subscribe its own shares. The consequences in case of violation are represented by the direct liability of the directors of the company, who are considered to be the effective subscribers of the shares and must pay them. Only directors who are in a position to give evidence of the fact that they have not been negligent are exonerated from liability. Intermediaries who subscribed the shares in their name but on behalf of the company are considered to be the effective subscribers of the shares and must pay them. Besides, the directors of the company who do not prove that they have not been negligent are jointly liable for the release of the shares. 111 Article 2358 of the civil code provides that the company cannot grant loans or give guarantees for the purchase of or the subscription to its own shares. Moreover, the company cannot accept its own shares as security. e)

Acquisition of shares by controlled companies

112 Similar restrictions are set out by the civil code as far as the subscription to and purchase of shares by controlled companies are concerned. 113 A definition of controlled companies is provided for by article 2359 of the civil code, which lists three relevant cases of controlled companies: a) companies in which another company holds the majority of the votes that can be exercised at the ordinary shareholders’ meeting; b) companies in which another company holds sufficient votes to exercise a dominant influence at the ordinary shareholders’ meeting; c) companies which are subject to the dominant influence of another company by virtue of particular contractual relationships with it. 114 The first restriction is represented by the radical prohibition for a controlled company to subscribe the shares of the controlling company. The consequences in case of violation of such prohibition are represented by the direct liability of the directors of the controlled company, who are considered to be the effective subscribers of the shares and must pay them. Only directors who are in a position to give evidence of the fact that they have not been negligent are exonerated from liability. Intermediaries who subscribed the shares in their name but on behalf of the controlled company are considered to be the effective subscribers of the shares and must pay them. Besides, the directors of the controlled company who do not prove that they have not been negligent are jointly liable for the release of the shares. 115 As far as the purchase of shares by controlled companies is concerned, article 2359 of the civil code provides that a controlled company can purchase the shares of the controlling company only a) if they are fully paid; b) for a consideration not exceeding the amount of the distributable profits and the available reserves of the controlling company. 464

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A special procedure has to be followed. The purchase must be authorized by the shareholders’ meeting, which establishes the main characteristics of the transaction, such as the maximum number of shares to be purchased, the period of time for which the authorization is valid, the minimum and the maximum price of the purchase. Besides, the nominal value of the shares of the controlling company purchased according to the preceding rules, together with the shares held by the company itself and by the other controlled companies, cannot exceed one tenth of the capital. In case of breach of the aforementioned provisions, the shares of the controlling company in excess must be sold by the controlled company in accordance with the procedure to be outlined by the shareholders’ meeting, within the year of their purchase. Otherwise, the shares must be promptly annulled by the controlling company and the capital of the company proportionally reduced. A legal reserve equal to the amount of the shares of the controlled company must be established and maintained until the shares are not transferred. The controlled company cannot exercise voting rights in the shareholders’ meeting of the controlling company. Special cases of purchase of shares by the controlled company are not subject to the 116 above described general provisions. In particular, the limitations to the purchase of shares of the controlling company do not apply when the purchase takes place: a) on a gratuitous basis, provided that the shares are fully paid up; b) as a result of a universal succession or a merger or a demerger; c) as a means for the satisfaction of a claim of the company, provided that the shares are fully paid up. In these special cases, if the nominal value of the shares exceeds one tenth of the capital of the company, the shares in excess must be sold by the controlled company within three years. If this is not done, the controlling company will have to annul the shares and reduce the capital. Special rules for the reciprocal acquisition of shares in case of listed Spas are set out in 117 the Legislative Decree n. 58/1998.

7.

The Shareholder

a)

Rights and Duties of a Shareholder

The rights and duties of shareholders are laid down in the civil code, the memorandum 118 and articles of association and the shareholders’ resolutions which are adopted in accordance with the articles of association. The rights and obligations of shareholders can be listed as follows:

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a) administration rights (right to vote at shareholders’ meetings, information/inspection rights, right to challenge the resolutions of the shareholders’ meetings); b) economic rights (dividend right, right to the proceeds of winding up); c) rights which have an economic /administrative content (right of option, right to receive free shares, right of withdrawal); d) duty to pay in the original contribution; e) obligation to provide collateral performances (only if stipulated in the articles of association). 119 In general, rights and obligations are proportional to the number of shares held by the single shareholder in the company, according to the so called capitalistic principle (memorandum of association dividend right, right to the proceeds of winding up, voting rights); however, some are linked with the person of the shareholder and do not depend on the number of shares held in the company (e.g. right to attend the shareholders’ meeting). As an exception to the capitalistic principle, special legislation grants the State or other public entities some rights (e.g. right of veto on resolutions about the winding up of the company, its merger or spin-off, the sale of the business concern) with respect to companies operating in strategic fields independently from their number of shares or from their quality of shareholders. Finally, as already mentioned in the preceding paragraphs, the administrative and economic rights pertaining to shareholders depend on the class of shares they hold. In fact, it is possible to have categories of shares carrying different rights compared to the typical rights carried by ordinary shares and provided for by the law. Classes of shares other than ordinary shares can be originally created by the memorandum of association or as a result of its subsequent amendments by a special shareholders’ meeting. 120 The existence of special classes of shares within a company determines a different internal organisation depending on the fact that different categories of shareholders with different interests exist. In this respect, article 2376 of the civil code provides that in case of different classes of shares or of financial instruments which grant administrative rights, the resolutions of the general shareholders’ meeting which affect the rights of one of them shall also be approved by a particular meeting of the shareholders belonging to the class concerned. These particular meetings are governed by the rules applicable to special meetings. b)

Shareholders’ Meetings

121 Spas are characterised by a three-tier structure. In fact three corporate bodies, each of which has specific functions determined by the law, must necessarily be present in all Spas: a) the shareholders’ meetings (assemblea dei soci), which has only deliberative functions limited by law to the most important decisions in the life of the company (e.g. the approval of the balance sheet, the amendments to the articles of association, the transfer abroad of the registered offices of the company; b) the board of directors (consiglio di amministrazione), which is provided by the law with the necessary powers to run the business of the company. Directors also 466

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have the legal representation of the company and have the duty to implement the shareholders’ resolutions under their personal liability; c) the board of statutory auditors (collegio sindacale), which has the function to control the functioning and administration of the company. As far as the administration and control of the company is concerned, the reform of the 122 corporate law which came into force on 1 January 2004 has introduced two alternatives to the above described traditional system of corporate governance: the dualistic system and the monistic system, whose main characteristic will be outlined afterwards. The function of the shareholders’ meeting is to deliberate on the matters which are 123 reserved to it by the law or the memorandum of association. Depending on the object of the resolutions to be adopted, the shareholders’ meetings are ordinary (assemblea ordinaria) or special (assemblea straordinaria). As from 1 January 2004, the resolutions pertaining to the ordinary shareholders’ meeting 124 vary according to the system of corporate governance adopted. Ordinary shareholders’ meeting of companies with a traditional or monistic system of corporate governance deal with: – the approval of the balance sheet; – the appointment and revocation of directors; – the appointment of the members of the board of the statutory auditors, including the chairman; – the appointment of the external auditor; – the determination of the compensation of directors and auditors, unless already determined in the memorandum and articles of association; – decisions concerning the liability of directors and auditors; – the authorisation which might be required by the articles of association for certain acts of directors; – the approval of the rules, if any, for the shareholders’ meeting. The reform of corporate law seems to have excluded the possibility – expressly granted 125 under the previous regime – for directors to submit particular operations to the approval of the shareholders’ meeting. In fact, article 2380-bis of the civil code states that the management of the company exclusively belongs to the directors. Besides, even when the authorisation of the shareholders’ meeting is required by the articles of association, directors remain directly liable for their acts. Ordinary shareholders’ meetings of companies with a dualistic system of corporate 126 governance resolve on a more limited range of matters. In fact, they deal with: – the appointment and revocation of the members of the supervisory board (consiglio di sorveglianza); – the determination of the compensation of the members of the supervisory board, unless already determined in the memorandum and articles of association; – the resolution concerning the liability of the members of the supervisory board; Mara Bolzoni

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– the distribution of profits, but not the approval of the balance sheet which pertains to the supervisory board; – the appointment of the external auditors. 127 The special shareholders’ meeting deals with: – the amendments to the article of association; – the appointment, the replacement, and the powers of the liquidators; – any other matter expressly attributed by law to its competence. 128 It is now possible for the articles of association to attribute to the competence of the board of directors (or the supervisory board) specific matters reserved by law to the competence of the special shareholders’ meeting. In this respect, article 2365 of the civil code indicates the resolutions relating to the merger under article 2505 (incorporation of wholly owned companies) and article 2505-bis (incorporation of companies owned at ninety per cent); the creation or suppression of secondary offices; the indication of the directors having the power to represent the company; the reduction of the capital in the event of withdrawal of one shareholder; the adjustment of the articles of association to provisions of law; the transfer of the registered offices of the company within the national territory. Moreover, the previous legislation already gave the possibility to attribute to the board of directors the faculty to increase the share capital of the company and to issue bonds (that is to say, debt obligations issued by the company) convertible in shares. 129 In case of different classes of shares or of financial instruments which grant administrative rights, the resolutions of the general shareholders’ meeting which affect the rights of one of them shall also be approved by a particular meeting of the shareholders (assemblea speciale) belonging to the class concerned. These particular meetings are governed by the rules applicable to special meetings. 130 Shareholders’ meetings are convened by the managing directors, in the municipality where the company has its registered offices, unless otherwise provided in the memorandum or articles of association. Shareholders’ meetings of Spas shall be called by means of a notice specifying the date and hour of he meeting and the matters to be discussed and resolved upon. The notice must be published in the Official Gazette (Gazzetta Ufficiale della Repubblica Itaiana) or at least on a daily newspaper, if the articles of association so provide, at least fifteen days before the day when the meeting is scheduled. Article 2366 of the civil code specifies that the articles of association of companies which have not recourse to the market of risk capital may avoid the publication of the notice, provided that it is given evidence of the receipt of the notice by shareholders at least eight days prior to the meeting. 131 Failing the above described formalities for the convocation of the shareholders’ meeting, the meeting is deemed validly formed when the entire share capital of the company is represented (that is to say all shareholders are attending the meeting, personally or by proxy) and the majority of the members of the administrative and control bodies are present.

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An ordinary shareholders’ meeting shall be called at least once a year adopting resolu- 132 tions concerning the annual balance sheet, distribution of profits and appointment of the administrative body of the company. In addition, managing directors are obliged to convene a shareholder’s meeting if shareholders holding at least one tenth of the entire share capital, or the lower percentage required by the articles of association, so request; if more than one third of the nominal share capital is consumed by loss; if they ascertain that a cause of dissolution has occurred. An ordinary meeting is regularly constituted when at least one half of the share capital 133 of the company is represented. The meeting is decided by an absolute majority of the votes cast, unless a higher majority is required in the articles of association. A special meeting decides with the positive vote of as many members as represent more than one half of the share capital of the company, unless a higher majority is required in the articles of association. Different percentages are required in case of special meetings of companies which make recourse to the market of risk capital. If the above conditions are not met, the meeting must be re-called. In the second meeting, the ordinary meeting adopts resolutions on the matters that should have been dealt in the first meeting, regardless of which part of the capital is represented by the shareholders in attendance; the special meeting is regularly constituted when more than one third of the capital is represented, and is decided by a majority of at least two thirds of the capital represented at the meeting. Article 2369 of the civil code provides that the articles of association may require higher majorities except for the approval of the balance sheet and the appointment and revocation of corporate officers. In any case, particularly important resolutions (e.g. changes in the business purpose of the company, the transformation of the company, its early dissolution) require stronger majorities for close companies. Moreover, different percentages are required in case of special meetings of companies which make recourse to the market of risk capital. The articles of association may authorize the expression of the vote by correspondence. 134 The minutes of the resolutions of the meeting are subject to registration in the book of 135 the shareholders’ meeting. The minutes must contain the following details: – the date when the meeting took place; – the identity of the shareholders who attended the meeting and the capital represented by each of them; – the modalities and the result of the vote; – the indications of the shareholders in favour, those who did not vote, and the dissenting ones; – a summary of the statements of the shareholders, upon their request. The minutes of special shareholders’ meeting must be drafted by a notary public. c)

Annullability of resolutions

Resolutions adopted in breach of the law or of the memorandum and articles of asso- 136 ciation may be challenged by:

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– the shareholders who did not attend the meeting, expressed a dissenting vote or did not express a vote; – the directors; – the supervisory board; – the board of auditors. 137 As from 1 January 2004, shareholders can challenge resolutions only if they represent, also in aggregate, at least one per thousand of the capital of the company which makes recourse to the market of the risk capital or five per cent of the others. Otherwise, shareholders are not entitled to request the annulment of the resolution and can only claim damages from the company which were caused by the non compliance of the resolution to the law or the memorandum and articles of association. 138 A particular hypothesis of annulment of a resolution is set out in article 2373 of the civil code, according to which the resolutions approved with the determining vote of shareholders having a conflict of interest with the company can be challenged if the company may be prejudiced. 139 Article 2377 of the civil code underlines that resolutions cannot be annulled in the following cases: – attendance to the meeting of non-entitled persons, unless such participation has been relevant with reference to the quorum of the meeting prescribed by law or by the articles of association; – invalidity of single votes, unless such invalidity is relevant with reference to the reaching of the majority of votes requested by law or by the articles of association; – incompleteness of the minutes of the meeting, unless they prevent the verification of their content, the validity and the effects of the resolution. 140 The challenge or the claim for damages must be filed before the competent court (the tribunal of the place where the company has its registered offices) within ninety days from the date of resolution, or from its registration in or deposit with the Register of Enterprises, if the resolution is subject to registration or deposit. 141 The company is given the possibility to avoid the annulment of the resolution by substituting it with another resolution, which is compliant with the law and the articles of association. 142 The annulment of a resolution does not affect the rights acquired in good faith by third persons on the basis of the implementation of the resolution. d)

Nullity of resolutions

143 Article 2379 of the civil code also provides for three cases to annul the resolutions. These are:

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– resolutions adopted without the previous calling of the meeting; – absence of the minutes of the meeting; – impossibility or illegality of the object of the resolution. In case of nullity, the resolution can be challenged by any interested party within three 144 years from the notation of its minutes in the book of the shareholders’ meeting, or from its registration in or deposit with the Register of Enterprises, if the resolution is subject to registration or deposit. The nullity may also be declared ex officio by the judge within the same term. The resolution which approves the balance sheet cannot be challenged once the bal- 145 ance sheet of the following fiscal year has been approved. e)

Shareholders’ agreements

Articles 2341-bis and 2341-ter, which were recently introduced in the civil code, provide 146 the rules applicable to shareholders’ agreements: – regulating the exercise of the voting rights in Spas or in the controlling companies (sindacati di voto); – imposing limits to the transfer of shares or the participations in the controlling companies (sindacati di blocco); – having as aim or as a result the joint exercise of a dominant influence on the company or the controlling companies. The above mentioned shareholders’ agreement cannot have a duration of more than 147 five years (three years in case of listed companies) and are deemed to have such a duration even in the case parties have agreed for a longer one. If the parties have not agreed for a duration, each party has the faculty to withdraw from the agreement with a prior notice of one hundred and eighty days. Shareholders’ agreements regarding companies making recourse to the market of risk 148 capital, and in particular listed companies, are subject a special publicity regime.

8.

The memorandum of association

The memorandum of association of an Spa can be shaped quite flexibly in accordance 149 with the needs of the business and those of the shareholders. Article 2328 of the civil code provides for the mandatory content of the memorandum and articles of association. For a complete list of the mandatory provisions pursuant to article 2328, we refer the reader to the chapter 2.1.b) a)

Amendments to the memorandum and articles of association

Amendments to the articles of association may consist in the insertion of new clauses or 150 in the modification or suppression of pre-existing clauses. Amendments to the articles of association, as well as to the memorandum of association, are dealt by the special Mara Bolzoni

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shareholders’ meeting, as expressly provided for by article 2365 of the civil code. The relevant resolution is therefore adopted with the favourable vote of shareholders representing than one half of the share capital of the company, unless a higher majority is required in the articles of association. Different percentages are required in case of special meetings of companies which make recourse to the market of risk capital. In case of companies which do not make recourse to market of risk capital, the same article 2365 requires higher percentages in the second meeting for the approval of particularly important amendments (e.g. changes of the business purpose of the company, changes of the type of the company, its early dissolution, the revocation of the liquidation, the transfer abroad of the registered offices of the company). The notary public who has drafted the resolution for the amendments of the articles of association, having verified compliance with the law, must file the resolution and the necessary authorisations, if any, with the Register of Enterprises and ask for its registration within thirty days. The Register of Enterprises, having verified the formal regularity of the documentation filed with, registers the resolution. Article 2436 specifies that only once the resolution for the amendments to them articles of association has been registered, it becomes effective. In order to make access to the articles of association easier to third parties, it is required that the complete revised text of the articles of association be filed with the Register of Enterprises together with the filing of any resolution for their amendment. b)

Capital Increase/Reduction

151 An increase and reduction of the share capital are special types of amendments to the memorandum of association and consequently the procedure described above has to be observed. 152 The Italian civil code provides two different forms of share capital increase: the capital increase with consideration and the capital increase without consideration. 153 As a general rule, article 2438 establishes that no capital increase may take place until the shares previously issued are not fully paid in. In case of breach of this rule, the directors of the company are severally and jointly liable for the damages caused to the shareholders and to third persons. 154 As far as the capital increase with consideration (aumento di capitale a pagamento) is concerned, article 2439 provides that the subscribers of the newly issued shares must pay to the company, at the moment of subscription, at least twenty five per cent of the nominal value of the shares subscribed. Besides, if a share premium is required, it must be paid at the moment of subscription. If the increase of capital takes place through contributions of property in kind or of claims, the newly issued shares must be fully paid up upon subscription and the special evaluation procedure described under article 2343 of the civil code applies. Newly issued shares (as well as bonds convertible in shares) must be offered as options to shareholders in proportion to the number of shares held by each of them. Shareholders who exercise the right of option also have the pre-emptive right to the unopted shares. No right of option is given with respect to the newly issued shares which must be 472

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paid by means of contributions in kind or claims. The articles of association of listed companies, may exclude the right of option up to the ten per cent of the pre-existing share capital if certain conditions are fulfilled. When the interest of the company so requires, the right of option can be excluded or limited by the resolution to increase the capital of the company (aumento di capitale riservato), if such resolution is passed by a higher majority (more than one half of the capital of the company). The particular procedure described under article 2441 has to be followed in this case (drafting of a special report by directors to be submitted to the board of statutory auditors; written opinion of the board of statutory auditors; price of the newly issued shares to be determined on the basis of the net value of the assets of the company and, in case of listed Spas, of the trend of the listings in the preceding six months). The right of option can also be excluded for up to twenty five per cent of the newly issued shares, if they are offered for subscription to the employees of the company, of a controlled company, or of a controlling one. With reference to the share capital increase without consideration (aumento di capitale 155 gratuito), article 2442 of the civil code provides that the special shareholders’ meeting can deliberate to increase capital by applying to capital the reserves resulting from the balance sheet to the extent available. In this case, the newly issued shares must have the same characteristics of the existing ones and must be given gratuitously to the shareholders in proportion to the number of shares held by each of them. This form of increase of share capital can also be effected by increasing the nominal value of the existing shares. The reduction of share capital, like the increase, can take two different forms: in fact, it 156 can be a real reduction or a nominal one, depending on the fact that the reduction is followed by a reimbursement to shareholders of part of their initial contributions (or by their release from the obligation to make the payments still due) or not. The first kind of reduction of capital (riduzione reale del capitale) is regulated by article 157 2445 of the civil code. Many cautions are contemplated, as the reduction could put into peril the interests of the creditors of the company. Among them, it is provided that the share capital of the company cannot be reduced under the minimum capital provided by law for Spas, that is to say Euro 120,000. Besides, after the reduction, the company cannot hold own shares in a percentage higher than ten per cent of the share capital. As from 1 January 2004, it is no more mandatory that the reduction of capital is resolved because of its overabundance as regards the business purpose of the company. The reduction must be resolved by a special shareholders’ meeting. The notice calling the meeting shall indicate the reasons and the procedures for the reduction. The resolution becomes effective only after three months from the date of its filing with the Register of Enterprises, provided that no prior creditor of the company has made an objection before the competent court within that period.

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158 The second kind of reduction of share capital is represented by the reduction pursuant to losses (riduzione del capitale per perdite) and is regulated under articles 2446 and 2447 of the civil code. When it appears that the capital of the company has lost more than one third, the directors shall call the special shareholders’ meeting without delay to take the necessary actions. A report on the financial condition of the company drafted by the directors together with the remarks of the board of statutory auditors must be filed with the registered offices of the company eight days before the meeting. At this stage shareholders are free not to reduce the capital of the company but if the loss is not reduced to less than one third in the following fiscal year, the shareholders’ meeting convened to approve the balance sheet of that year must reduce the capital in proportion of the losses that have been ascertained. According to article 2447, if the capital of the company falls below the minimum established by law (that is to say, Euro 120,000) due to losses of over one third of the capital, the directors shall without delay call the special shareholders’ meeting to resolve the reduction of the capital and the concurrent increase to an amount not less than the minimum or on the change of type of company. c)

Shareholders’ right of withdrawal

159 As a result of the recent reform of Italian corporate law, the rules about shareholders’ right of withdrawal have radically been modified in order to grant higher level of protection to minority shareholders. In fact, the cases which legitimate the withdrawal of the shareholder have been increased. Moreover, the legal criteria in the determination of the value of the shares of the shareholders entitled to liquidation have been modified so that the economic interests of minority shareholders are more protected than before. 160 Shareholders who did not attend the meeting, expressed a dissenting vote or did not express a vote in occasion of the following resolutions have the right to withdraw from the company: – changes in the business purpose of the company, when they imply a significant change in the activity of the company; – change of the type of company; – the transfer abroad of the registered offices of the company; – the revocation of the liquidation; – the elimination of one or more of the reasons for withdrawal that can be derogated or that are provided for by the articles of association; – the changes to the criteria in the determination of the value of the shares in case of withdrawal; – the amendments to the articles of association concerning the voting or the participating rights; – if the company is listed on regulated markets, the resolution which determines the exclusion of the company from the listing. 161 In all these cases, the right of withdrawal cannot be derogated by the articles of association. Besides, any shareholders’ agreement aiming at eliminating the right of

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withdrawal is void. A peculiarity of the above cases of withdrawal is represented by the fact that it is possible for shareholders to exercise the right of withdrawal also partially. Unless otherwise provided by the articles of association, shareholders who did not 162 concur to the approval of resolutions which determine the extension of the life of the company or the introduction or removal of limits to the circulation of share certificates are entitled to withdraw. Finally, the articles of association of close companies can provide for further cases which 163 entitle to the exercise of the right of withdrawal. Pursuant to article 2437 of the civil code, the right of withdrawal is exercised by means 164 of a registered letter to be addressed to the company within fifteen days from the filing of the relevant resolution with the register of Enterprises. Once the right of withdrawal has been exercised, the relative shares cannot be transferred and must be filed with the registered offices of the company. Anyway, the same article specifies that the right of withdrawal cannot be exercised (and, if already exercised, is not valid) if within ninety days the company revokes the relevant resolution or deliberated its winding up. As far as the liquidation procedure is concerned, as already mentioned, the most im- 165 portant change introduced by the reform of corporate law concerns the criteria in the determination of the value of shares to be reimbursed. Different criteria are respectively applied to close and listed companies. With regard to close companies, the value of the participation is no longer determined on the basis of the latest balance sheet approved by the shareholders’ meeting. In fact, it is now provided that the value of the liquidating shares be determined by the directors of the company on the basis of the current value of the company and of its expected profits, as well as on the market value of the shares, if any. Directors must request for the opinion of the board of statutory auditors and of the external auditor. With regard to listed companies, the value of the participation is determined on the basis of the market price of the shares of the company during the preceding six months. The directors must offer in option the shares of the withdrawing member to the other shareholders, who also have a pre-emptive right for the purchase of the unopted shares. In the event that not all the shares of the withdrawing member are purchased by the shareholders, the directors of the company must offer them to third parties (on the market, if the shares are listed). Failing this, the shares of the withdrawing member must be reimbursed by the company with profits and available reserves. In the absence of profits or available reserves, the special shareholders’ meeting must resolve the reduction of the capital of the company or its winding up.

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166 As already mentioned, the reform of corporate law which came into force on 1 January 2004 has introduced two alternatives to the traditional system of corporate governance. 167 The alternative systems (monistic and dualistic system) will be described afterward. 168 The traditional system of management and control applies to all Spas whose articles of association do not expressly provide differently. In the traditional system the management of the company belongs to a sole director (amministratore unico) or to more directors, who constitute the board of directors (consiglio di amministrazione). a)

Directors

169 As above mentioned, the management of the company exclusively belongs to directors, who shall act in order to reach the business purpose. They are invested with different and fundamental functions. In fact, directors: – decide on each and every issue related to the management of the company, which is not attributed by law to the competence of the shareholders’ meeting (the so called potere gestorio); – have (all or some of them) the power of representation of the company (potere di rappresentanza); – call the shareholders’ meeting and determine their agenda; besides, they shall implement shareholders’ meetings resolutions and have the power /duty to challenge the resolutions which are in breach of the law or of the articles of association; – must keep the company books and, in particular, draft the project of balance sheet to be approved by the shareholders’ meeting; – must prevent the performance of prejudicial acts to the interest of the company or eliminate or reduce their harmful consequences. 170 All these functions directly derive from the law and not from the shareholders’ mandate. Directors are independent from the shareholders’ meeting. In fact, they must control that the shareholders’ meeting act in compliance with law and the articles of association and must not implement shareholders’ resolutions which could determine a damage to the company. As a consequence, directors are personally liable to the company for damages deriving from the non-observance of the duties imposed upon them by law and by the articles of association. 171 The first directors are appointed in the memorandum of association. Subsequently, their appointment belongs to the competence of the ordinary shareholders’ meeting. The number of directors to be appointed is determined by the articles of association. The articles of association can also provide for a minimum and maximum number of directors; in this case, the shareholders’ meeting convened to appoint directors shall 476

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also determine their number. Only natural persons (e.g. no corporate entities) with full capacities are eligible to become directors and they have to be personally reliable, e.g. individuals convicted of certain criminal bankruptcy offences are precluded. Non-shareholders as well as shareholders may be appointed as directors of the company. No preclusions apply to foreign citizens. The articles of association can of course provide for further conditions to be met by the designated directors. The appointment of directors cannot be done for a period longer than three years and terminate on the date of the shareholders’ meeting convened for the approval of the balance sheet related to the last fiscal year of their appointment. Unless otherwise provided in the articles of association, directors can be re-elected for further three-year periods. A person ceases to be director before the due date in the following cases: – removal (revoca) by the shareholders’ meeting; according to article 2383 of the civil code, the shareholders’ meeting can deliberate to remove directors at any time, even if they were appointed in the articles of association, except for the directors’ right to compensation for damages, if the removal occurs without legitimate cause; – dismissal (rinuncia); – decay from office (decadenza), because of the occurrence of one of the causes of ineligibility; – death.

172

The cessation of directors at the expiration date becomes effective only when the 173 administrative body has been re-formed. The dismissals of directors become immediately effective if the majority of the board of directors continues in office. When the effects of cessation of directors cannot be postponed (death, decay, dismissal of a minority of directors), the law provides for particular rules for their replacement. Three scenarios are contemplated: – if vacancies of a minority of the directors occur, the others provide for their replacement by resolution approved by the board of statutory auditors (cooptazione); the directors so appointed remain in office until the next shareholders’ meeting; – if vacancies of a majority of directors occur, the others shall call a shareholders’ meeting to provide for their replacement; if not otherwise provided by the articles of association, the term of office for the newly appointed directors expires at the same time as for those in office at the time of their appointment; – if a vacancy of the sole director or of all directors occurs, the board of statutory auditors shall call a shareholders’ meeting for their replacement without delay; in this contingency, the board of statutory auditors must look after the ordinary course of business, given the temporary lack of an administrative body. The articles of association can also provide that as a consequence of the cessation of 174 office of some directors the entire board ceases to operate. Should this be the case, the directors who remained in office (or, if provided for by the articles of association, the board of statutory auditors) shall call without delay the shareholders’ meeting for the appointment of the new board of directors.

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175 The appointment /cessation of directors has to be applied for registration with the Register of Enterprises. Newly appointed directors can themselves file the application concerning their appointment. Ceased directors can file the application concerning their cessation only if the cessation becomes effective on a date later than the filing of the application. Regarding the registration of the appointment /cessation of directors with the Register of Enterprises it is important to consider that third parties rely on the publication in the Register of Enterprises; therefore if appointment /cessation of a director is not yet registered, the company cannot deny the appointment /cessation towards third parties. As a consequence, a company could be bound by any legal transaction entered into by a former managing director who has not been erased from the Register of Enterprises. Of course this does not apply if third parties know the true facts. 176 Directors are entitled to compensation for their activity. Methods and measure of payments of directors are provided by the articles of association or are decided by the shareholders’ meeting at the time of their appointment. The remuneration of directors with special functions (e.g. managing directors) is decided by the board of directors, after having heard the board of statutory auditors. 177 Directors are subject to a prohibition of competition with the company. In particular, directors cannot become partners with unlimited liability in competing companies, nor carry out competitive activities for their own account or for the account of third persons, nor be appointed directors or general managers in competing companies unless expressly authorised by the shareholders’ meeting. 178 When the management of the company is given to more than one director, they constitute the board of directors (consiglio di amministrazione). The board of directors choose its chairman (presidente del consiglio d’amministrazione) among its members, unless he is appointed by the shareholders’ meeting. The chairman convenes the board of directors, determines the agenda of the meetings of the board, makes sure that adequate information on the issues on the agenda are given to all directors. 179 If it is provided by the articles of association, or the shareholders’ meeting so permits, the board of directors may delegate its functions to an executive committee (comitato esecutivo) formed by some of its members or to one or more of its members (amministratori delegati). The board of directors determines the limits and the modalities for the exercise of the delegated powers and can bring back to the board delegated function at any time. 180 The law establishes the functions of the board of directors which cannot be delegated to the executive committee or to managing directors (e.g. drafting of the balance sheet). b)

Management and Representation

181 Italian corporate law distinguishes between management (amministrazione) and representation (rappresentanza) of the company: whereby management refers to internal acts and representation refers to external acts. As far as the representation of the company is concerned, if the company is managed by a board of directors, the articles of association 478

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shall indicate who, among them, has the power of representation of the company. Moreover, if several directors have the power of representation of the company, the articles of association shall indicate if they can act separately or not. Usually, the power of attorney is given, jointly or separately, to the chairman of the board of directions together with one or more managing directors. Article 2384 of the civil code states that the power of representation granted to the directors is general, that is to say that it is no more limited to the acts necessary to achieve the business purpose. The limitations of the power of representation, even if published by means of registration with the Register of Enterprises, cannot be set up against third persons, unless the company prove that they deliberately acted to the detriment of the company. Moreover, the invalidity of the appointment of directors with the power of representation of the company cannot be set up against third persons after the appointment has been filed with the register of Enterprises, unless the company prove that they were aware of the said invalidity. c)

Liability of directors

Directors are civilly liable: a) to the company; b) to the creditors of the company; c) to 182 single shareholders and third persons. Directors are also subject to administrative and criminal liability. aa)

Liability to the company

Directors must fulfil the duties imposed upon them by law and by the articles of 183 association with the diligence requested by their office and in accordance with their skills. If the directors do not fulfil their duties with the required diligence, the company may, in certain circumstances, sue them for damages. Should the powers be delegated to a managing director or an executive committee, the other members of the board may be jointly liable to the company for failing to supervise the conduct of corporate affairs. Directors are also jointly liable to the company for failing to prevent or reduce the negative consequences of prejudicial acts to the company, of which they were aware. In any case, the managing directors and the executive committee are bound to provide appropriate information to the board of directors regarding the management of the company. In order for the company to sue a director for damages, a resolution of the shareholders’ meeting is necessary. The resolution concerning the liability of directors can be adopted at the time of examination of the draft balance sheet, even if not included in the agenda, when it relates to matters pertaining to the fiscal year the balance sheet refers to. The action must be started within five years from the cessation of the director form his office. If the resolution is passed by a majority of votes representing at least one fifth of the capital of the company, the director is automatically removed from his office and must be replaced. The recent reform of corporate law has introduced the possibility for shareholders, representing at least one fifth of the capital or the different percentage indicated in the articles of association, to sue directors for damages on behalf of the company. Lower percentages and further conditions are required for members of listed companies.

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bb) Liability to company creditors

184 Directors are liable to the creditors of the company for non-observance of their duties concerning the preservation of the assets of the company. Creditors are entitled to action when company assets are insufficient for the satisfaction of their claims. cc)

Liability to single shareholders or third persons

185 Directors are also liable towards any shareholder or third person who has been directly injured as a result of a director’s malice, fraud or negligence. This is the case, for instance, of directors that draft a false balance sheet and as a consequence induce third persons to become shareholders of the company. d)

Chief executive officers

186 The above summarised provisions on directors’ liability also apply to chief executive officers appointed by the shareholders’ meeting or indicated in the articles of association with reference to the functions entrusted to them, without prejudice to the actions which may be exercised on the basis of the employment agreement between the chief executive officer and the company. e)

Other representatives of an Spa

187 In addition to directors who, as above mentioned, are the legal representatives of the company, an Spa may grant further individuals the power of representation of the company by means of a power of attorney (procura) which can be either general or special.

10. Board of Statutory Auditors 188 The board of statutory auditors is an internal auditing panel entrusted with the supervision of the management of the company, in order to ensure that its activities comply with the law and the articles of association. 189 The board of statutory auditors of closed companies is composed of three or five regular members, who may be shareholders or not. Two substitute auditors, who can replace a regular auditors who cease to hold office, must also be appointed. The board of statutory auditors of listed companies has a more flexible structure. In fact, the articles of association can freely determine the number of statutory auditors, provided that the minimum number of regular statutory auditors is three and that two substitute auditors must be appointed. 190 The first statutory auditors are appointed in the memorandum of association. Subsequently, their appointment belongs to the competence of the ordinary shareholders’ meeting. Pursuant to Legislative Decree n. 58/1998, the memorandum of association of listed companies must establish that at least one regular auditor is appointed by the minority shareholders; moreover, if the board of statutory auditors is composed of more

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191

than three members, at least two regular auditors must be appointed by the minority shareholders. Regarding the personal qualifications required for a statutory auditor to be appointed, article 2397 of the civil code provides that, in close Spas, at least one regular auditor and one substitute auditor must be selected among those registered in the register of examiners of accounts established with the Italian Ministry of Justice. Different regulations apply to listed companies. Besides full legal capacity there are few other restrictions concerning the personal qualifications for members of a supervisory board, all aiming to grant the independence of the statutory auditors: being related by blood or marriage to the directors of the company; being a director of or being related by marriage or blood to controlling or controlled companies or of companies under the same control; being related to the company or to controlling or controlled companies or to companies under common control by an employment relationship or by a regular consultancy contract or by economic relationships which may prejudice their independence. Of course the articles of association may provide for further qualifications. The compensation of the statutory auditors must be decided in advance and cannot be 191 modified during their term of office, in order to preserve the independence of auditors. In this respect, article 2402 of the civil code states that the annual remuneration of the auditors, if not provided for by the articles of association, must be decided by the shareholders’ meeting at the time of their appointment for the entire duration of their term of office. Statutory auditors remain in office for a three-year period and, contrary to directors, 192 cannot be removed by the shareholders’ meeting except for a legitimate cause. In any case, the resolution which revokes the auditors for a legitimate cause, to become effective, must also be approved by the competent court. The termination of the auditors for termination of their appointment becomes effective only from the time the board has been re-formed. In the other cases of termination of a statutory auditor (e.g. death, resignation) the substitute auditor senior in age takes his place immediately and the subsequent shareholders’ meeting appoint the regular and substitute auditors necessary to integrate the board. The appointment and the cessation of office of the auditors must be filed with the 193 register of Enterprises within thirty days by the directors of the company. As previously mentioned, the main function of the board of statutory auditors is the 194 supervision of the management of the company, in order to ensure that its activities comply with the law and the articles of association. Article 2403 of the civil code, specifies that the board has to verify in particular the adequacy of the organisation, administrative and accounting structure of the company. As from 1 January 2004, the auditing of the annual accounts of close Spas is no longer 195 entrusted to the board of statutory auditors. In fact, it is now required that this functions be performed by an external auditor, as legislative decree 58/1998 had already required for listed companies. As an exception to this general rule, article 2409-bis of the civil Mara Bolzoni

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code provides that the articles of association of close Spas which are not required to have consolidate accounts may entrust the board of auditors with the auditing of the annual accounts of the company. 196 In order to accomplish their functions, the members of the board of statutory auditors must attend all meetings of the directors, the executive committee, the shareholders. They are also in a position to require the directors to provide them with information or documentation with reference to the general business of the company or to single transactions. 197 Each shareholder can report to the board of statutory auditors facts in the management of the company he deems censurable. If such compliant is submitted by shareholders representing one twentieth of the capital of close companies, or one fiftieth of the capital of companies which make recourse to the market of risk capital, the board of statutory auditors shall investigate about that facts and submit the results of their investigation to the shareholders’ meeting. The articles of association can provide for lower percentages. If deemed necessary, the board of auditors can also call the shareholders’ meeting. a)

Liability of statutory auditors

198 Statutory auditors, like directors, must fulfil their duties with the diligence requested by their office and in accordance with their skills. 199 If they do not fulfil their duties with the required diligence, they may be sued for damages. In particular, auditors are liable in case of false statements and if they do not keep the secret on any information about the company acquired because of their office. 200 Furthermore, statutory auditors are jointly liable with the directors for acts and omissions of the latter, when the damages would not have occurred if they had exercised their duty of vigilance.

11. External auditors 201 As already mentioned, as a result of the reform of Italian corporate law, the accounting control of all Spas is now entrusted to external auditors. In this respect, three slightly different systems apply: a) Spas which do not make recourse to the market of risk capital: the accounting control is exercised by an auditor (natural person) or by an auditing firm registered in the register kept by the Ministry of Justice. In the event of an Spa which does not make recourse to the market of risk capital and is not required to have consolidated accounts, the accounting control can be exercised by the board of statutory auditors. In such a case, pursuant to article 2409-bis of the civil code, all members of the board of statutory auditors must be auditors registered in the register created with the Ministry of justice.

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b) Spas which make recourse to the market of risk capital but are not listed on the Stock Exchange: the accounting control is exercised by an auditing firm registered in the register kept by the Ministry of Justice. In such cases, the auditing firm is subject to the provisions of Legislative Decree 58/1998 concerning the auditing activity for listed Spas. c) Listed Spas: the accounting control is exercised by auditing firms registered in a special register kept by the CONSOB, Consob shall supervise the activity of the auditing firms entered in the special register to verify their independence and technical adequacy. In performing its supervision, Consob may require auditing firms to communicate data, information, records and documents periodically or otherwise; carry out inspections and obtain information and clarification from members, directors, members of the board of auditors and chief executive officers of auditing firms; recommend principles and methods to be adopted for auditing activity. The first external auditors are appointed in the memorandum of association. Subse- 202 quently, the appointment is made by the shareholders’ meeting after having heard the opinion of the board of statutory auditors. The annual remuneration of the external auditors must be decided by the shareholders’ meeting at the time of their appointment for the entire duration of their term of office. External auditors remain in office for a three-year period and, contrary to directors, cannot be removed by the shareholders’ meeting except for a legitimate cause, after having heard the board of statutory auditors. In any case, the resolution which revokes the external auditors for a legitimate cause, to become effective, must also be approved by the competent court. The external auditors must verify, during the fiscal year and at least every quarter, the regular keeping of the accounting books of the company. Moreover, they must verify if the balance sheet corresponds to the results of the accounting books of the company and if they comply with the law. Finally, the external auditors must express in a specific report an evaluation of the balance sheet. In performing their functions, the external auditors may require directors to communicate data, information, records and documents and may proceed with inspections.

12. Alternative systems of corporate governance Along with the above described traditional structure, the reform of Italian corporate law 203 has introduced two alternative management and control systems, respectively deriving from the German and English experience and recommended by the EU Council Regulations on the “European Company By-laws” dated 8 October 2001: a) The dualistic system (sistema dualistico): where the articles of association expressly 204 provide for a dualistic system of corporate governance, the corporate bodies are the shareholders’ meeting (assemblea dei soci), the management committee (consiglio di gestione) and the supervisory board (consiglio di sorveglianza). The accounting control is invariably entrusted to an external auditor or auditing firm. The management committee, has the same type of functions as those which are attributed to the traditional board of directors. The tasks of the supervisory board are wider than those of the board Mara Bolzoni

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of statutory auditors. In fact, in addition to the general supervision and control of the management of the company, it is entrusted with the appointment and revocation of the members of management committee and with the approval of the company’s balance sheet. The supervisory board is also exclusively entitled to promote actions in liability against members of the management committee and to waive such actions by way of settlement out of court. Consequently in a company managed in accordance with this two-tier system the functions of the shareholders’ meeting are confined to appointing and revoking members of the supervisory board, promoting actions in liability against members of the supervisory board; distributing profits, appointing external auditors. 205 b) The monistic system (sistema monistico): where the articles of association expressly provide for a monistic system of corporate governance, the corporate bodies are the shareholders’ meeting (assemblea dei soci), the board of directors (consiglio di amministrazione) and the internal audit committee (comitato per il controllo sulla gestione). The accounting control is invariably entrusted to an external auditor or auditing firm. According to this system, management is entrusted to a regular board of directors. At least one third of its members must have the requisites of independence set forth by the civil code for the statutory auditors and, if provided by the articles of association, also the requisites provided for by the codes of behaviour drafted by trade associations or by companies which manage regulated markets. Supervision is attributed by the board to an internal audit committee whose members are chosen from among independent directors, who must not be managing directors or members of the executive committee and in any case do not perform functions pertaining to the management of the company, or of controlling or controlled companies. It is up to the board to determine the number of members of such committee. In companies which make recourse to the capital market, the committee must be formed by no less than three members. At least one member of the internal audit committee must be a registered auditor.

13. Company books and Accounting a)

Company books

206 Pursuant to article 2421 of the civil code, in addition to books and other accounting records that every enterpriser shall keep (a journal, an inventory book, accounting records), Spas shall keep: a) the shareholders’ book, which shall indicate the details of each shareholder, every transfer of shares, any encumbrances relating to shares (e.g. pledge, usufruct, attachment); this book is kept by the directors (or the members of the management committee); b) the bonds book, which shall indicate the amounts of the bonds issued and of those redeemed, the details of the holders of registered bonds, every transfer of bonds and any encumbrances relating to them; this book is kept by the directors (or the members of the management committee); c) the book of the minutes of the shareholders’ meetings; this book is kept by the directors (or the members of the management committee); 484

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d) the book of the minutes of the board of directors’ (or the management committee’s) meetings; this book is kept by the directors (or the members of the management committee); e) the book of the minutes of the board of auditors’ (or the supervisory board’s or the internal audit committee’s) meetings; this book is kept by the board of auditors (or the supervisory board or the internal audit committee); f) the book of the minutes of the executive committee’s meetings; this book is kept by the executive committee; g) the book of the minutes of the bondholders’ meetings; this book is kept by the representative of the bondholders. h) the book of financial instrument issued according to article 2447-sexies of the civil code; this book is kept by the directors (or the members of the management committee). b)

The Balance Sheet

The directors of the company shall draft the annual accounts, that is to say the balance 207 sheet (bilancio di esercizio), which consists of: – the financial statement (stato patrimoniale), showing all assets and liabilities of the company; – the profit and loss account (conto economico), that is to say a schedule of the expenses and revenues concerning the fiscal year; – and the integrative note (nota integrativa), indicating the criteria applied in the evaluation of balance sheet items and their detailed description. Besides, the balance sheet must also be accompanied by a report of the directors on the 208 situation of the company and the trend of transactions, with particular regard to costs, revenues and investments, and a report of auditors on the results of the fiscal year and the keeping of accounts. A similar report shall be drafted by the subject entrusted with the accounting control. The criteria which must be applied in drafting the balance sheet are indicated under 209 article 2423 of the civil code, according to which the balance sheet shall be drafted with clarity (chiarezza) and represent in a true and correct manner the assets, liabilities, financial position and the profit and losses of the company during the fiscal year (rappresentazione veritiera e corretta). If the company is part of a consolidated group of companies there might be the addi- 210 tional obligation for the directors to prepare consolidated annual accounts and a consolidated management report. This obligation principally exists for a parent capital company domiciled in Italy which controls other companies by means of shareholding. As far as the procedure for the adoption of the balance sheet is concerned, the following 211 steps are necessary: a) drafting of the balance sheet and of a report on the situation of the company and the trend of its transactions by the directors or the management committee;

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II. The Joint Stock Corporation (Spa)

b) submission of the draft balance sheet with the report by the directors to the board of statutory auditors at least thirty days prior to the scheduled day for the shareholders’ (or the supervisory board’s) meeting to be convened for the adoption of the balance sheet; c) drafting of a report on the results of the fiscal year and the keeping of accounts by the board of statutory auditors; d) filing with the registered offices of the company of a copy of the draft balance sheet, together with full copies of the latest balance sheet of controlled companies and a summary of the essential data of the latest balance sheet of affiliated companies, at least fifteen days prior to the scheduled day for the shareholders’ meeting to be convened for the adoption of the balance sheet. Also the reports of the directors and auditors must be filed with; e) adoption of the balance sheet by the ordinary shareholders’ meeting (or by the supervisory board). 212 The shareholders’ meeting which adopts the balance sheet also decides about the distribution of the profits of the company, if any. In the event of adoption of the balance sheet by the supervisory board, an ordinary shareholders’ meeting shall be called in order to resolve upon the distribution of dividends. In any case, profits can be distributed to shareholders only after the deduction of the necessary sums to establish the legal reserve and the other statutory or facultative reserves, if any. Within thirty days from the adoption of the balance sheet, a copy of the balance sheet together with the reports and the minutes of approval of the shareholders’ meeting (or of the supervisory board’s meeting) must be filed by the directors with the Register of Enterprises or sent by registered mail. Within the same timeframe, non listed companies shall also file with the Register of Enterprises an adjourned list of shareholders accompanied by the analytical notation of the recordings made in the shareholders book starting from the day of approval of the balance sheet of the preceding fiscal year. 213 The reform of corporate law has introduced special rules with reference to the challenging of the resolution which adopts the balance sheet. In fact, article 2434-bis of the civil code provides that the resolutions of approval of the balance sheet cannot be challenged once the balance sheet for the following fiscal year has been approved. In the event of a resolution adopting a balance sheet on which the subject entrusted with the accounting control has made no comments, only shareholders representing also in aggregate a percentage of at least five per cent of the capital are entitled to challenge it, even in case of nullity. 214 Companies which do not have securities listed on regulated markets can draft the balance sheet in an abbreviated form, provided that the conditions set out in article 2435-bis of the civil code are met. In particular, Spas are allowed to draft the balance sheet in an abbreviated form if for two subsequent fiscal years they have not exceeded two of the following limits: a) total assets in the balance sheet: Euro 3,125,000; b) revenues from sales and services: Euro 6,250,000; c) an average of 50 employees during the fiscal year.

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14. Taxation Spas have a number of tax returns and tax payments duties both for direct and indirect 215 tax purposes. As far as direct taxes are concerned, the Legislative Decree 344/2003 has reformed the 216 Italian taxation system. As to the part relating to corporate income taxes, the above mentioned decree came into force on 1 January 2004. The most significant changes introduced by the reform are represented by the new corporate income tax, called IRES (Imposta sul reddito delle societa`), that has replaced IRPEG (Imposta sul reddito delle persone giuridiche) and by a reduction in the corporate income tax rate from 34% to 33%. Companies are required to file and submit IRES and IRAP tax returns to the Italian Tax Authorities within the tenth month following the end of the company’s fiscal year. As to the tax payments, companies are required to make balance and advanced tax payments. The balance payment refers to the previous year’s income earned whilst the advanced payment refers to the taxes to be paid for the year when the payment is made. The advanced payment amounts to 99% of the IRES and IRAP taxes paid for the previous year and must be paid in two instalments. As far as indirect taxes are concerned, the main indirect tax applicable to transactions 217 made by corporations is the VAT. By virtue of the Italian legislation in the matter for VAT purposes persons or companies carrying out supply of goods or services have the duty to issue an invoice, in duplicate copy, for each transaction made. Finally, it is worth noting that the reform of the Italian taxation system has introduced 218 the possibility for Italian corporations to elect “transparency taxation,” previously available only to partnerships, where they are controlled by other corporations. Particularly, where corporations elect transparency taxation, their income (or loss) is taxed (or deducted) at the level of their shareholders, regardless of the actual profits’ distribution. This option is available only if all the shareholders of the company are companies, tax resident in Italy, with a participation of at least 10 %, but not exceeding 50 % each. The decree introduces a total tax exemption for dividends distributed among companies which opted for transparency taxation, as opposed to the ordinary tax treatment which grants a 95% tax exemption of the gross dividend.

15. Termination of the business Pursuant to article 2484 of the civil code, reasons for the dissolution of an Spa are: 218 a) expiration of the time designated in the articles of association, unless the special shareholders’ meeting does not resolve, with a majority of more of one third of the capital even in the second meeting, to extend it before its expiration; the shareholders who did not concur to the approval of such resolution are entitled to withdraw, unless otherwise provided in the articles of association; b) achievement of the business purpose or supervened impossibility to achieve it, unless the shareholders’ meeting does not resolve on the necessary amendments to the articles of association (change of the business purpose); Mara Bolzoni

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c) impossibility for the company to function or continuous inactivity of the shareholders’ meeting due, for example, to the shareholders’ absenteeism so that the fundamental resolutions cannot be adopted (e.g. approval of the balance sheet, appointment of directors and auditors); d) reduction of the capital below the minimum required by law, unless the shareholders’ meeting does not resolve on the reduction of the capital and the concurrent increase to an amount not less than the minimum required by law or on the change of type of company; e) resolution of the special shareholders’ meeting to dissolve the company following the withdrawal of one or more shareholders; impossibility to reimburse the shares of the withdrawing shareholder without reducing the capital of the company in case of granting of the creditors’ opposition; f) resolution of the special shareholders’ meeting to dissolve the company to be adopted by as many shareholders as representing more than one third of the capital even in the second meeting; g) the other reasons provided in the memorandum or articles of association of the company; h) the judicial declaration of nullity of the company; i) the other reasons provided for by law (e.g. declaration of bankruptcy). 219 Pursuant to article 2485 of the civil code, directors must without delay ascertain the occurrence of a reason of dissolution and file with the Register of Enterprises a declaration to give note of the dissolution of the company. Until the appointment of the liquidators has been filed with the Register of Enterprises, the directors maintain the management of the company but only for the purposes of the maintenance of the integrity and value of the assets of the company. Liquidators are appointed by the special shareholders’ meeting, which must be convened by the directors at the discovery of the event of dissolution, with the majorities required for the amendments to the articles of association. Such meeting shall also resolve on: – the number of liquidators to be appointed and, in case of a plurality of liquidators, the rules for the functioning of the board of liquidators; – the indication of the liquidators with the power of representation of the company; – the criteria which shall govern the liquidation process; the powers of the liquidators with specific regard to the assignment of the business concern, of parts of the business concern, or of individual assets or rights; the acts necessary to preserve the value of the business including its provisional exercise. 220 Unless otherwise provided in the articles of association or in the resolution of appointment, the liquidators are entitled to do whatever necessary for the winding up of the company. The liquidators must draft the balance sheet and indicate in particular the trend as well as the perspectives also as to the duration of the winding up procedure and the criteria adopted to realise it. The liquidators must proceed with the payment of the company’s debts and subsequently with the distribution of the advances on the result of the winding up in favour of the shareholders. If the available funds are insufficient for the payment of the company’s debts, liquidators can request shareholders to pay what is still outstanding on their respective shares. 488

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After the winding up process has been completed, the liquidators must draft the final 221 accounts, which must be accompanied by the reports of the statutory auditors and of the subject entrusted with the accounting auditing and filed with the Register of Enterprises. If in the subsequent ninety days no objection is brought before the competent court by the shareholders, the final accounts are deemed to be approved. The liquidators can consequently ask for the cancellation of the company from the 222 Register of Enterprises. Upon completion of the winding up the company’s books and records shall be kept for ten years in the office of the Register of Enterprises to enable their inspection by every interested person (e.g. shareholders or company’s creditors) upon payment of the related expenses.

III. Partnership Limited by Shares (Sapa) 1.

Features of the Sapa

The “Sapa” (societa` in accomandita per azioni) is characterised by the presence of two 223 classes of shareholders: a) the general partners (soci accomandatari), who are jointly and severally liable for the company’s obligations and who are also the directors of the company; b) the limited partners (soci accomandanti), who are liable for the company’s obligations only within the limits of the value of the capital subscribed and who cannot be the directors of the company. The Sapa is also characterised by the fact that the participation of shareholders in the 224 capital of the company is represented by shares. Article 2454 of the civil code states that the rules relative to Spas apply to Sapas, 225 insofar they are compatible with the special provisions set out by the articles 2455 2461 for partnerships limited by shares. Such special provisions take into account the peculiar position of general partners within this type of company. This form of business is seldom used.

2.

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Special provisions applicable to Sapas

Article 2453 of the civil code states that the business name of the company must be 227 composed of the name of at least one of the general partners, with an indication of the business form of partnership limited by shares. The memorandum of association shall indicate the names of the general partners. As 228 already mentioned, article 2455 of the civil code states that general partners are the directors of the company without limits of time, unless otherwise provided by the memorandum of association, and are subject to the same duties as the directors of Spas. Mara Bolzoni

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229 Anyway, directors can be removed by the shareholders’ meeting with the same majority as is prescribed for special meetings of Spas. The removal of directors from their office, determines the loss of the status of general partner of the company. As to liability of general partners to third persons, article 2461 states that a general partners who ceases to be director of the company is not liable for the obligations of the company arising after the filing with the Register of Enterprises of his cessation from office. In the event of removal without legitimate cause, the director is entitled to claim damages. The same majority is required for the replacement of directors. Nevertheless, if there is more than one director, the appointment of the new one shall be approved by all the directors who have remained in office. The new directors becomes general partner from the date of his acceptance of the appointment. 230 Another peculiarity provided by the civil code is represented by the introduction of a further reason of dissolution of the company. Pursuant to article 2458 of the civil code, in case all the directors cease from office, the company is dissolved unless, within six months, directors have been replaced.

IV. Limited Liability Company (Srl) 1.

Features of the Srl

231 The Italian civil code outlines the two main characteristics of the corporate form “Srl” (societa` a responsabilita` limitata): a) in an Srl, only the company is liable with its assets for the company’s obligations (art. 2462), that is to say that the liability of its members is limited to the value of the part of capital respectively subscribed; b) the participations of members in the capital of an Srl (quote) cannot be represented by shares and cannot be the object of solicitations for the investments (art. 2468). As a result of the reform of corporate law, Srls can now issue bonds, if this is expressly permitted in the articles of association, which can be subscribed only by qualified investors (e.g. banks), that is to say that an Srl cannot place bonds directly to the public. 232 Until the recent reform of company law, most of the rules governing an Spa were also applicable to an Srl. By the reform the Italian legislator has clearly manifested its intention to regulate limited liability companies in a totally different manner by stressing the importance of the personal contribution provided to the company by quotaholders. The numerous changes introduced by the reform aim to make limited liability companies more flexible. In fact, many choices about the organisation and the corporate governance are now left to the quota-holders. For all these reasons, the Srl is the kind of structure which is more suited to small-to-medium sized enterprises, and in particular to family companies, where limited liability is required.

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2. Incorporation of an Srl

2.

Italy

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Incorporation of an Srl

The formation procedure of an Srl presents only a few differences compared to the 233 corresponding formation procedure of an Spa. In fact, most of the provisions regulating the formation of an Spa apply to limited liability companies by express provision of law. In particular, article 2463 of the civil code states that the articles under the chapter concerning the Spa, which regulate the requirements for formation, the execution of the formation documents, the registration procedure, the nullity of the company and the particular benefits for the founders directly apply to limited liability companies. Like the Spa, an Srl can be formed by contract or by unilateral deed through a pro- 234 cedure which articulates in two phases: a) the execution of the memorandum of association; b) the registration in the Register of Enterprises. The provisions which regulate the formation of an Spa through public subscription do not apply to limited liability company. Pursuant to art. 2463 of the civil code the following provisions are mandatory in the 235 memorandum of association of an Srl: 1) The details of each quota-holder.

236

2) The name of the company and the municipality where the registered office of the company is 237 located as well as the municipality where the branches, if any, are located. The name of the company can be freely formed, like the name of an Spa, but it shall include the indication that the company is an Srl. 3) The object of the company, that is to say the business purpose of the company.

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4) The amount of the capital subscribed and the amount paid in. The minimum share 239 capital of an Srl is equal to Euro 10,000. In this respect, it must be outlined that it is now possible for quota-holders to replace the payment of the twenty five per cent of the contributions (or of their full amount in case of formation by unilateral deed) and of the premium with the execution of an insurance policy or a bank guarantee having at least the same amount of that due. 5) The contributions of each quota-holder and the value attributed to the claims and properties 240 contributed in kind, if any. Where provided by the memorandum of association, contributions may consist in any item with an economic value, including the performance of services. Contributions consisting in the performance of services are allowed under the condition that their value is guaranteed by an insurance policy or a bank guarantee. If the articles of association so provide, the insurance policy or the bank guarantee may be replaced by quota-holders with a payment in cash as caution. This possibly differentiates the Srl from the Spa. In fact, as previously mentioned, in an Spa contributions consisting in the performance of work or services are not admitted.

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IV. Limited Liability Company (Srl)

241 6) The participation (quota) of each quota-holder. 242 7) The rules concerning the functioning of the company, with the indication of those relating to the management and the representation of the company. 243 8) The persons entrusted with the management and the accounting control. 244 9) The total amount of the formation costs attributed to the company. a)

Pre-incorporation status

245 Like Spas, limited liabilities companies are subject to the provisions of article 2331 of the civil code concerning the effects of the registration of the newly incorporated company in the Register of Enterprise as well as the liability regime applicable to transactions entered into in the name of the company before it acquires legal existence. Therefore, we refer the reader to chapter II, paragraph 2.3. b)

Cost and Duration of the Formation procedure

246 The costs and time scale for incorporating an Srl are not very different from those for the Spa, excepted, of course, for the capital which must be paid in advance. Therefore, we refer the reader to chapter II, paragraph 2.4. c)

Nullity of the Srl

247 Limited liabilities companies are subject to the provisions of article 2332 of the civil code concerning the effects of the nullity of an Spa after it has been filed with the Register of Enterprises. Therefore we refer the reader to chapter 2.5.

3.

Srl with a sole quota-holder

248 In 1993, a decree implementing the XII EEC directive on the harmonisation of company law made it possible for Srl to be incorporated by a sole quota-older. The recent reform of Italian company law has finally introduced the same possibility for an Spa. As from 1 January 2004, the provisions applicable to an Spa with a sole shareholder also apply to unipersonal Srls. This means that, as to contributions, both at the time of formation of the company and of increase of share capital, the sole quota-holder must immediately pay the entire subscribed capital. In case of failure of the plurality of members during the life of the company, payments still due must be made within ninety days. Should the sole quota-holder not comply with these provisions, the principle of limited liability would not apply. Moreover, the documents and correspondence of the company must indicate that the company has one quota-holder only. Besides, the directors of the company must file with the Register of Enterprises a declaration containing the details (name and surname or company name, date and place of birth or of incorporation, domicile or registered seat and citizenship) of the sole quota-holder within thirty days. Until the above information are not provided to the Register of Enterprises, the sole 492

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quota-holder is unlimitedly liable for the company obligations. A special discipline also applies to contracts and transactions between the Srl and its sole quota-holder, which has been described in chapter II, paragraph 3.

4.

Contributions

The share capital of an Srl, like that of an Spa, is formed by the contributions of each 249 quota-holder. As previously mentioned, contributions in the capital of an Srl may consist in any item with an economic value, including the performance of services. Therefore, three kind of contributions are possible in a limited liability company, provided that its memorandum of association so permit: 1) contributions in cash; 2) contributions in kind; 3) contributions consisting in the performance of work or services. a)

Contributions in cash

Unless otherwise provided in the memorandum and articles of association, contribu- 250 tions shall be made in cash. As previously mentioned, prior to execution of the memorandum of association, at least twenty five per cent of the contributions in cash or, in the event of incorporation by unilateral deed, their full amount, must be deposited with the bank account of the new company. Specific rules apply to quota-holders who are in default of payment. Pursuant to article 251 2466 of the civil code, after the prescribed deadline has elapsed, the directors of the company can give the defaulting quota-holder a term of thirty days for payment of the amount still due. In case of failure of payment by a quota-holder within such deadline, the directors can decide weather to start an action for the enforcement of the contribution or to offer his quota to the other quota-holders in proportion with their participation in the capital of the company. The sale is made at the risk of the defaulting quota-holder at the value resulting from the latest balance sheet approved by the quota-holders. In the absence of offers, if so provided by the memorandum of association, the directors are entitled to sell the participation at auction. If the shares cannot be sold, the directors can declare the dismissal of the quota-holder and retain the sums already collected from him. The capital must then be reduced to an amount corresponding to the participation of the dismissed quota-holder. Also the defaulting quotaholder of an Srl cannot exercise his voting rights as it is provided with reference to shareholders of an Spa. b)

Contributions in kind

As already mentioned, the participations corresponding to properties or claims con- 252 tributed in kind must be fully paid up upon subscriptions. Rules related to contributions in kind regarding a limited liability company provide for a simplified procedure of evaluation compared with that applied to Spas. In fact, the value of such contributions must be determined by a report of an expert, an accounting firm, or an auditing firm. Mara Bolzoni

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IV. Limited Liability Company (Srl)

Therefore, the designation of an expert by the president of the competent court, following the procedure described in article 2343 of the civil code for Spas, is not necessary. Furthermore, no revision of the evaluation of the expert by the directors is contemplated. c)

Contributions consisting in the performance of services

253 As mentioned above, a limited liability company differentiates from an Spa because contributions consisting in the performance of work or services are admitted, if the memorandum of association so provides. Article 2464 of the civil code states that contributions may consist in any item with an economic value. Contributions consisting in the performance of services are allowed under the condition that their value is guaranteed by an insurance policy or a bank guarantee. If the memorandum of association so provide, the insurance policy or the bank guarantee may be replaced by quotaholders with a payment in cash as caution. d)

Purchases from promoters, founders, shareholders and directors

254 Article 2465 of the civil code provides that the simplified procedure of evaluation of the contributions in kind also applies to purchases by the Srl from founders, quota-holders and directors that: a) have a consideration equal to or higher than one tenth of the capital of the company; b) are performed within two years form the filing of the company with the Register of Enterprises. Therefore, the seller shall submit a report of an expert containing a description of the assets object of the transaction, the value attributed to each of them, the criteria of evaluation applied, and a declaration that such value is not lower than the consideration agreed for the purchase. The transaction must be authorised by a decision of the quota-holders adopted pursuant to article 2479 of the civil code. 255 If this procedure is not complied with, the directors of the company as well as the transferor are jointly liable for damages caused to the company, to the quota-holders, or to third persons. 256 The above described procedure do not apply to the transactions which are performed upon normal conditions in the current business of the company or those that occur in regulated markets or under the supervision of the judicial or administrative authorities.

5.

Quota-holders’ loans

257 As a result of the reform of corporate law, a specific regime (which, on the contrary, is not contemplated for Spas) is applied to quota-holders’ loans in favour of an Srl. Pursuant to article 2467 of the civil code, the reimbursement of such loans can be effected only after the other company’s creditors have been fully paid. Furthermore, if the reimbursement is made in the year preceding the declaration of bankruptcy of the company, it must be paid back. In substance, rules governing quota-holders’ loans are 494

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258

similar to those regulating capital contributions. The same article provides a definition of quota-holders’ loans subject to the preceding provisions: quota-holders’ loans in favour of the company are those done when company’s debts are excessive if compared with the net assets or when a contribution rather than a loan would have been expected.

6.

The Srl participation

Pursuant to article 2468 of the civil code, the participations of shareholders in the 258 capital of an Srl is divided into quotas and cannot be represented by shares nor can be the object of solicitations for the investments. Moreover, quotas cannot be embodied in certificates subject to the rules of circulation of negotiable instruments. In principle, the economic and administrative rights of the quota-holders are propor- 259 tionate to their holdings and the value of their holdings is proportioned to the value of their contributions, although the memorandum of association may provide otherwise. In fact, article 2468 of the civil code states that the memorandum of association may provide for the granting to single shareholders of special rights relating to the management of the company or the distribution of profits. a)

Transfer of quotas

Quotas may be freely transferred by inter vivos acts and by succession at death, unless 260 otherwise provided by the memorandum of association. In fact, the memorandum of association of an Srl can not only limit the transfer of quotas by pre-emption provisions (clausole di prelazione) or consent provisions (clausole di gradimento) but also provide for their non-transferability. Furthermore, as far as consent provisions are concerned, the memorandum of associa- 261 tion of a limited liability company may contain provisions which subordinate the transfer of quotas to the mere agreement of the social bodies or of other quota-holders (clausole di mero gradimento). In such cases, the quota-holder or his successors are entitled to exercise the right of withdrawal. The transfer of quotas has effect with respect to the company as from the date of 262 registration of the transfer in the quota-holders’ book. The deed of transfer, with authenticated signatures, must also be filed by the authenticating notary public with the Register of Enterprises. After the filing with the Register of Enterprises has been done, the transfer has effect also with regard to third parties. b)

Pledge, usufruct, attachment of quotas

Article 2471-bis of the civil code states that the provisions of article 2352 concerning 263 shares subject to pledge, usufruct, attachment or seizure also apply to quotas, save for the provisions of the third paragraph of article 2471. According to such article, if the quota is not freely transferable and the creditor, the debtor and the company do not reach an Mara Bolzoni

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IV. Limited Liability Company (Srl)

agreement with respect to its sale, the sale is made at auction; but the sale is without effect if, within the subsequent ten days, the company finds another purchaser who offers the same price. c)

Operations of the company on its own quotas

264 Pursuant to article 2474 of the civil code, a limited liability company cannot purchase or accept as guarantee its own quotas, or grant loans or guarantees for their purchase or their subscription.

7.

Quota-holders’ decisions

265 As a result of the reform of corporate law, the members of a limited liability company can decide how to allocate powers and functions between the various corporate bodies. 266 Pursuant to article 2479 of the civil code the members of an Srl shall decide: a) on the subject reserved to them by the memorandum of association; b) on the issues which one or more directors or members representing at least one third of the capital submit to their approval; c) in any case, on the following matters: – the adoption of the balance sheet and the distribution of profits; – the appointment, if provided in the memorandum of association, of the directors; – the appointment (mandatory or optional) of the statutory auditors, of the chairman of the board of statutory auditors, of the external auditor; – the amendments to the memorandum of association; – the decision to enter into transactions which cause a substantial change to the business purpose or a relevant change to the rights of the members. 267 The memorandum of association may provide that the decisions of the quota-holders be adopted through consultation in writing or on the basis of the consent expressed in writing. In such case, decisions are adopted with the vote of quota-holders representing at least one half of the capital of the company. In the absence of such provision, and in any case with reference to the amendments to the memorandum of association and the decision to enter into transactions which cause a substantial change to the business purpose or a relevant change to the rights of the members, or if one or more directors or members representing at least one third of the capital request it, the decisions of quotaholders must be adopted by resolutions of the quota-holders’ meeting. a)

Quota-holders’ meetings

268 Pursuant to article 2479-bis of the civil code, the memorandum of association can determine the modalities to convene the quota-holders’ meeting in order to assure prompt information on the issues to be dealt with. In the absence of such provisions, quota-holders’ meetings are convened by registered letter sent to the quota-holders’ at least eight days prior to the date scheduled for the meeting.

496

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Italy

269

The meeting shall take place in the municipality where the company has its registered 269 offices, unless otherwise provided in the memorandum of association. Failing the above described formalities for the convocation of the shareholders’ meet- 270 ing, the meeting is however deemed validly formed when the entire capital of the company is represented (that is to say all quota-holders are attending the meeting, personally or by proxy) and all the directors and auditors are in attendance or informed of the meeting and no one of them objects to the dealing of the matter. The meeting is regularly constituted when at least one half of the capital of the 271 company is represented. The meeting decides by an absolute majority of the votes cast. With regard to decisions concerning the amendments to the memorandum of association or the entering of the company into transactions which cause a substantial change to the business purpose or a relevant change to the rights of the members, the meeting decides with the vote of members representing at least one half of the capital. b)

Invalidity of resolutions

From 1 January 2004, the rules concerning the invalidity of resolutions of the members 272 of an Srl are partially different compared to those applicable to Spas. Pursuant to article 2479-ter of the civil code, decisions adopted in breach of the law or of the memorandum and articles of association may be challenged by: – the quota-holders who did not attend the meeting, expressed a dissenting vote or did not express a vote; – each director; – the board of auditors. The decisions adopted with the determining participation of quota-holders having, 273 directly or on behalf of third persons, a conflict of interest with the company can be challenged if the company may be prejudiced. The challenge must be filed before the competent court (the tribunal of the place where 274 the company has its registered offices) within three months from the date the notation of the relevant decision in the book of the quota-holders’ decisions. The court may assign a term no longer than six months for the adoption of a new decision which annuls the effects of the challenged one. The decisions having an illegal or impossible object and those adopted in the total 275 absence of information can be challenged by any interested party within three years from its notation in the book of the quota-holders’ decisions. The decisions concerning any change in the business purpose of the company contemplating illegal or impossible activities may be challenged without any time limit. As for the rest, article 2479-ter states that the provisions concerning the invalidity of 276 the resolutions of Spas apply to the extent compatible.

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8.

Italy

IV. Limited Liability Company (Srl)

The memorandum of association

277 As mentioned, the memorandum of association of an Srl can be shaped flexibly in accordance with the needs of the business and those of the quota-holders. Article 2463 of the civil code provides for the mandatory content of the memorandum of association. For a complete list of the mandatory provisions pursuant to article 2463, we refer the reader to paragraph 2 under the present chapter. a)

Amendments to the memorandum and articles of association

278 Pursuant to article 2480 of the civil code, amendments to the articles of association must be resolved by the quota-holders’ meeting in accordance with article 2479. The relevant minutes must be drafted by a notary public. As to the registration procedure of the quota-holders’ decision, article 2436 applies. Therefore, the notary public who has drafted the resolution for the amendments of the articles of association, having verified compliance with the law, must file the resolution and the necessary authorisations, if any, with the Register of Enterprises and ask for its registration within thirty days. The Register of Enterprises, having verified the formal regularity of the documentation filed with, registers the resolution. Article 2436 specifies that only once the resolution for the amendments to them articles of association has been registered, it becomes effective. In order to make access to the articles of association easier to third parties, it is required that the complete revised text of the articles of association be filed with the Register of Enterprises together with the filing of any resolution for their amendments. b)

Capital Increase/Reduction

279 An increase and reduction of the capital of the company are special types of amendments to the memorandum of association and consequently the procedure described above has to be observed. As an alternative to a quota-holders’ resolution, the memorandum of association may give directors the power to increase the capital of the company. Article 2481 establishes that no capital increase may take place until the contributions still due have not been paid in. 280 As far as the capital increase with consideration (aumento di capitale a pagamento) is concerned, the subscribers of the capital increase must pay to the company, at the moment of subscription, at least twenty five per cent of the nominal value of the capital subscribed. Besides, if a premium is required, it must be paid at the moment of subscription. If the increase of capital takes place through contributions of property in kind or of claims, they must be fully paid up upon subscription and the special evaluation procedure described under article 2464 of the civil code applies. The quota-holders are entitled to subscribe the capital increase in proportion with their holdings. Only if the memorandum of association provides it, the quotas of new issue can be offered to third parties. In such a case, quota-holders who did not consent to this decision are entitled to withdraw.

498

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281

With reference to the share capital increase without consideration (aumento di capitale 281 gratuito), article 2481-ter of the civil code provides that the company may increase the capital using at this aim the reserves and other funds resulting from the balance sheet to the extent available. The reduction of share capital, like the increase, can take two different forms: in fact, it 282 can be a real reduction or a nominal one, depending on the fact that the reduction is followed by a reimbursement to shareholders of part of their initial contributions (or their release from the obligation to make the payments still due) or not. The first kind of reduction of capital of an Srl (riduzione reale del capitale) is regulated by 283 article 2482 of the civil code. It is provided that the share capital of the company cannot be reduced under the minimum capital provided by law for Srls, that is to say Euro 10,000. The decision of the quota-holders to reduce the capital becomes effective only after three months from the date of its filing with the Register of Enterprises, provided that no prior creditor of the company has made objection before the competent court within that period. The second kind of reduction capital is represented by the reduction pursuant to losses 284 (riduzione del capitale per perdite) and is regulated under the subsequent article 2482-bis of the civil code. When it appears that the capital of the company has diminished more than one third due to losses, the directors must call the quota-holders’ meeting without delay to adopt the necessary resolutions. A report on the financial condition of the company drafted by the directors together with the remarks of the board of statutory auditors, if any, must be filed with the registered offices of the company eight days before the meeting, unless otherwise provided in the memorandum of association. At this stage quota-holders are free not to reduce the capital of the company but if the loss is not reduced to less than one third in the following fiscal year, the meeting convened to adopt the balance sheet of that year must reduce the capital in proportion of the losses that have been ascertained. Finally, according to article 2482-ter, if the capital of the company falls below the minimum established by law due to losses of over one third of the capital, the directors must without delay call the quota-holders’ meeting to resolve on the reduction of the capital and its concurrent increase to an amount not lower than the minimum or on the change of type of company. c)

Quota-holders’ right of withdrawal

As a result of the recent reform of Italian corporate law, the rules about quota-holders’ 285 right of withdrawal have radically been modified in order to grant a higher level of protection to minority members of limited liability companies, which are close companies. The memorandum of association can indicate the circumstances which entitle the 286 quota-holder to withdraw together with the modalities of exercise of the right of withdrawal.

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287

Italy

IV. Limited Liability Company (Srl)

287 Moreover, the cases provided by law which legitimate the withdrawal of the quotaholder have been increased. Pursuant article 2473 of the civil code, quota-holders who did not attend the meeting, expressed a dissenting vote or did not express a vote in occasion of the following resolutions have the right to withdraw from the company: – changes in the business purpose of the company; – change of the type of company; – merger or demerger of the company; – the transfer abroad of the registered offices of the company; – the revocation of the liquidation procedure; – the elimination of one or more of the reasons which entitle to withdraw that are provided for by the memorandum of association. 288 Members of a limited liability company are also entitled to withdraw in case of completion of transactions which determine a substantial change in the business purpose of the company or a relevant change of the members’ rights. 289 Finally, in the case of an Srl without termination, quota-holders are entitled to withdraw at any time, provided that a notice of six months is given. The memorandum of association may provide for a longer notice, which in any case cannot be longer than one year. 290 According to the aforementioned article, the right of withdrawal cannot be exercised (and, if already exercised, has no effect) if the company revokes the relevant resolution or deliberates its winding up. The time limit within which the right of withdrawal must be exercised is not indicated. 291 As far as the liquidation procedure is concerned, as already mentioned with regard to Spas, the most important change introduced by the reform of corporate law concerns the criteria in the determination of the value of the quota to be reimbursed. It is now provided that the value of the liquidating quota must be determined by the directors of the company on the basis of the current value of the company, which is calculated with reference to its market value. In case of disagreement, the value of the participation must be determined by an expert appointed by the competent court. The reimbursement of the participation must be made within six months from the exercise of the right of withdrawal. It can also be made through the purchase of the liquidating quota by the other quota-holders in proportion with their participations or by a third party chosen by the quota-holders. Failing this, the quota of the withdrawing member must be reimbursed by the company with available reserves. In their absence, the capital of the company must be reduced in proportion to the value of the reimbursement. If it is not possible, the company is put into liquidation. 292 It is worth mentioning that the reform of corporate law has also introduced the possibility for the memorandum of association of an Srl to provide for specific cases of expulsion of a member. In such a case the above described provisions of article 2473 apply, except for the possibility to reimburse the quota of the expulsed member through the reduction of the capital of the company.

500

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9. Directors

9.

Italy

293

Directors

As previously mentioned, pursuant to the legislative decree no. 6/2003, the members of 293 a limited liability company can now decide how to allocate powers and functions among the corporate bodies. Thanks to this contractual freedom, directors can be entrusted with all the matters 294 except for those that can be exclusively dealt by the quota-holders according to article 2479, first paragraph, of the civil code. On the other hand, the appointment of directors does not seem to be mandatory anymore, as the quota-holders can also assume the management of the company. Unless otherwise provided in the memorandum of association, the directors shall be 295 quota-holders. They are appointed without time limits with a decision of the members adopted according to article 2479 of the civil code. The managing body of an Srl may be freely shaped by quota-holders by way of recourse 296 to some alternative solutions: – a sole director; – a traditional board of directors collectively acting; – a board of directors non collectively acting (that is to say that decisions are adopted outside a formal board of directors’ meeting), formed by a plurality of members having the same powers. Depending on the quota-holders’ choices, such directors may operate: a) severally: this alternative, however, is characterised by the power of each director to veto resolutions proposed by the other directors; b) severally on certain issues (for instance in matters concerning the day-to-day business); c) jointly; d) jointly on certain matters (for instance as regards the so called “extraordinary administration”).

297

The possibility of establishing a board of directors who do not act collectively as 298 traditional boards but severally or jointly is expressly provided by article 2475 of the civil code. According to it, the memorandum of association may provide that a formal board meeting is not necessary to resolve on issues concerning the management of a company. In this case decisions may be adopted through consultation in writing or on the basis of the consent expressed in writing. However, the drafting of the projects of balance sheet, of mergers and de-mergers, as well as the resolutions for capital increase (if attributed to the competence of the directors by the memorandum of association) must be dealt by the board of directors’ meeting. a)

Management and Representation

As previously mentioned, while the concept of management (amministrazione) refers to 299 internal acts, that of representation (rappresentanza) refers to external acts. As far as the Mara Bolzoni

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IV. Limited Liability Company (Srl)

representation of the Srl is concerned, article 2475-bis of the civil code states that the directors have the power to represent the company. The limitations of the power of representation of the directors which appear from the memorandum of association or in the act of their appointment, even if published by means of registration with the Register of Enterprises, cannot be set up against third persons, unless the company prove that they deliberately acted to the detriment of the company. b)

Liability of directors

300 Like directors of an Spa, directors of an Srl are civilly liable: a) to the company; b) to the creditors of the company; c) to single shareholders and third persons. Directors are also subject to administrative and criminal liability. 301 Similar rules to those provided for Spas apply. 302 An important difference is however represented by the possibility for each quota-holder to sue a director for damages on behalf of the company. It is also possible to request a summary order of revocation of the directors in case of serious irregularities in the management of the company. 303 Finally, article 2476 of the civil code provides that also the quota-holders who have intentionally decided or authorised the acts prejudicial to the company (that is to say, the quota-holders who, de facto, manage the company as they were directors) are jointly liable with the directors.

10. Board of Statutory Auditors and External Auditors 304 The memorandum of association may provide for the appointment of a board of statutory auditors or of an external auditor. However, the appointment of a board of statutory auditors is mandatory only where the company capital is in excess of Euro 120,000 or when the turnover or the size of the Srl are beyond certain thresholds determined by article 2435-bis with reference to the possibility of drafting the balance sheet in abbreviated form.

11. Company books and Accounting a)

Company books

305 Pursuant to article 2478 of the civil code, in addition to books and other accounting records that every entrepreneur shall keep (a journal, an inventory book, accounting records), limited liability companies shall keep: 1) the quota-holders’ book, which shall indicate the details of quota-holders, the quota of each member, the payments made on quotas, changes in membership; this book is kept by the directors; 2) the book of the quota-holders’ decisions; this book is kept by the directors; 502

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306

3) the book of the board of directors’ decisions; this book is kept by the directors; 4) the book of the minutes of the board of auditors’ or of the external auditor’, if appointed; this book is kept by the board of auditors. b)

The Balance Sheet

The principles which apply to the drafting of the balance sheet of an Srl, as well as to 306 the distributions of profits, do not present important differences compared to those applicable to Spas, a large part of which directly apply to limited liability companies.

12. Taxation Spas and Srls are subject to the same tax regime. Therefore we refer the reader to 307 chapter II, paragraph 14.

13. Termination of the business The same provisions examined with reference to the dissolution and winding up of an 308 Spa also apply to limited liability companies. In fact, articles 2484 2496 of the civil code are conceived for all types of capital companies. Therefore we refer the reader to chapter II, paragraph 15.

V.

Branches of foreign companies (Features)

Article 2508 of the civil code recognises the possibility for companies incorporated 309 abroad to establish one or more branch offices with permanent representation within the Italian territory. Each branch office is subject to the provisions of Italian law concerning the publicity of company documents (that is to say, for instance, the deposit and registration of the memorandum of association in the register of Enterprises or the deposit of the balance sheet). Besides, the same article provides that foreign companies must also publish the details of the branch manager, that is to say the person who represents them permanently in Italy, with the indication of their powers. The provisions of article 2250 of the civil code concerning the mandatory information to be indicated in the records and correspondence of a company also apply to the single branches offices. In order to set up a branch in Italy the following would be necessary: a) minutes of the shareholders’ meetings (or of any other competent corporate body according to the local law) of the parent company resolving to open a branch in Italy, establishing its address, appointing the branch manager (the so called preposto), his powers, and legalised by way of the Apostille under the Hague Convention which must be translated into Italian and sworn before the competent judicial authority; b) a declaration that the branch manager accepts his appointment (this may be included in the above); Mara Bolzoni

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Italy

V. Branches of foreign companies (Features)

c) the memorandum and articles of association of the parent company legalised, translated into Italian and sworn before the competent judicial authority. 310 On the basis of such documents, which must be filed with an Italian notary public, the latter will carry out the formalities necessary to obtain the registration of the branch office with the local Register of Enterprises office. Further formalities in order to commence the operations of the Italian branch, once the above requirements have been complied with, are the opening of accounting books, the issue of a VAT and fiscal code number, as well as the attainment of all the necessary authorisations and administrative licenses for specific activities which may be requested. 311 The duly established branch is not a separate entity from the parent company and the latter will be directly responsible for all operations carried out by the branch. This means, in effect, that the parent company has unlimited liability for the obligations assumed by the branch manager and this feature is usually considered unsatisfactory. However, the setting up of a branch is strictly necessary when only the parent company has the requisites necessary to allow the performance of certain activities such as banking and insurance operations which, in Italy, require for instance a quite high minimum capital.

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Lithuania Rolandas Valiu¯nas and Dovile˙ Burgiene˙

Table of Contents I.

Character of UAB and AB

II. Formation 1. Formation procedure a) execution of the formation documents b) initial shareholder contributions and their payment prior to registration 2. Registration procedure/ the commercial register 3. Approval requirements 4. Shelf companies 5. Cost/Duration 6. Requested information on business letters

III. The shareholder 1. 2.

Rights and duties of a shareholder Shareholder resolutions /shareholder meetings

IV. UAB-share and AB-share 1. 2. 3.

Classes of shares Transfer of shares Own shares

507 509 509 509 510 511 512 512 513 514 514 514

b) registration with the commercial register 4. Capital increase/decrease a) general information b) increase of authorised capital by additional contributions c) increase of authorised capital out of company funds d) capital decrease

VI. Management board 1. 2. 3. 4.

Managing directors Management and representation Responsibilities and personal liability of managing directors Other representatives of a company

VII. Supervisory board 516 518 518 520 522

1. 2. 3. 4.

Mandatory/optional supervisory board Composition and responsibilities Qualifications Consultative/advisory council

1. a) b) c) d)

Mandatory content company name registered seat business objective share capital and amount of shareholder contribution 2. Additional provisions of the articles of association 3. Amendment of articles of association a) formally recorded shareholder resolution

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

522 522 522 523 523 523

1. 2. 3.

Prohibition of repayment of shareholder contributions Capital substituting loans Obligation to petition for insolvency proceedings

IX. Accounting 1.

523 524

525 525 526 527 527 528 529 530 531 531 531 532 532

VIII.Selected capitalization and liability

questions V. Articles of Association

524 524 524

2. 3.

Bookkeeping and annual financial statements (publication obligations) Audit requirements Disclosure

532 532 533 533 535 535 537 538

524

505

Lithuania

Index

X. Taxation (only general aspects

of the tax treatment, in particular applicable taxes) 1. a) b) 2. a) b)

Direct taxes Corporate Profit Tax Personal Income Tax Indirect taxes Value Added Tax Excise Tax

2.

538 538 538 540 542 542 543

XI. Dissolution of a company/

termination of the business 1.

Grounds for liquidation

Expiry of the term of a company’s activities 3. Voluntary winding up 4. Involuntary winding up 5. Bankruptcy 6. Unsatisfactory results of the expert’s review of activities 7. Company “in liquidation” 8. Distribution of assets 9. Completion of winding up 10. Reorganisation

544 545 545 546 547 548 549 549 549

544 544

Index Akcine˙ bendrove˙ (AB, public company) 2, 8, 30, 74 Articles of Association 9, 11, 17, 19, 33, 41, 43, 45-47, 51-52, 55-56, 58, 62, 74-75, 77-83, 87, 9091, 93, 99-100, 102, 104, 108-109, 113, 117-118, 123-124, 129, 131, 156-157, 188, 192, 198, 206 Audit 5, 43, 46, 65, 154-157 Balance sheet 5, 36, 94, 109, 121, 135, 148-149, 151-152, 155 Board (of directors) 5, 12-14, 19, 41, 45-46, 52, 79, 90, 101-110, 112, 116-118, 120, 124-126, 131, 163, 195 Bond(s) 4-5, 34, 43, 52 Bookkeeping 146 Branch(es) 79, 109, 121 Business Accounting Standards 144, 147, 154 Business letters 30 Capital (authorised capital, share capital) 5, 9, 10-11, 15-17, 19, 26, 30, 34, 36, 43, 46, 52-53, 55, 65-66, 71, 78, 83-84, 86-100, 108-109, 129, 131, 146-149, 165, 187, 191-192, 198, 205 Capital decrease 43, 97-99, 191 Capital increase 34, 43, 52, 58, 83-84, 86-95, 99, 100, 129 Capitalisation requirements 17, 131 Chief executive officer (CEO) 2, 12-14, 19, 31, 41, 43, 45-47, 62, 79, 90, 101, 103, 107-110, 112, 116, 118, 120-121, 124-126, 131, 133, 137, 139, 153, 195

506

Collective representation 19, 108 Company (firm) name 8, 19, 23, 27, 30, 74, 192, 201 Corporate profit tax 158-159, 164-165 Creditor(s) 32, 39-40, 89, 98, 130, 133-134, 136-140, 142-143, 187, 195-197, 203, 206-207 Creditors’ meeting 139, 140, 187, 196 Dissolution (winding up) 6, 34, 39, 43, 52, 146, 178, 187, 190, 191-194, 198, 199-204 Dividend 34-39, 55, 59, 159, 166, 207 Employee shares 60 Employee(s) 5, 32, 60, 89, 108, 118, 130, 138, 151-152, 155, 163-164, 177, 199 Equity (own) capital 17, 36, 46, 71, 98, 131, 146-149, 191 Excise tax 184-185 Fiduciary duties 111 Financial statements 5, 24, 43, 46, 65, 93, 109, 124, 148-155, 157, 203-204 Founding meeting 10-14, 19 General (shareholders’) meeting 5, 12, 19, 34-35, 37, 40-50, 52, 59, 71, 79, 81, 83, 87, 90, 93, 96-97, 101, 103-104, 106, 108-109, 113-115, 123-124, 127, 131, 153, 157, 187-188, 191, 200, 205, 208 Incorporation agreement 9, 15-16, 192, 198 Incorporation report 10 Initial (shareholder) contributions 10-11, 15-16, 19, 91, 129

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13. Termination of the business In-kind contributions 10, 16, 19 Insolvency 36, 89, 132-133, 135, 138-139, 190 International Standards on Auditing 65 Legal form 8, 19, 30, 43, 52, 74, 146, 191 Loan(s) 73, 131, 159, 165, 181, 197 Mergers 210 NACE classification 77 Notary (notarisation) 18-21, 27-29, 82, 87 Organisation for Economic Co-operation and Development (OECD) 1 Own shares 43, 71-73, 92, 95, 97 Parent (company) 51, 105, 126 Permanent establishment 159-160, 164-164, 174 Personal income tax 169-175 Pre-emption right(s) 34, 43, 51-52, 62, 90 Preference shares 34 Principle of incorporation 76 Procuration 121 Register of legal persons 6, 8, 10, 18-19, 21-22, 24, 27, 29, 82, 86-87, 91, 93, 99, 103, 105, 129, 153, 157, 189, 200-201, 203, 209 Registered office (seat) 19, 24, 30, 75, 180 Reorganisation 6, 43, 52, 146, 178, 210 Report on company’s activities 5, 43, 46, 109, 124, 157 Reserve(s) 34, 36, 43, 65-66, 71, 92, 94-95 Restructuring 43, 52, 132, 141-143 Securities Commission 5, 27, 29, 65-66, 203

I.

Lithuania

1

Shareholder(s) 2, 5, 10-12, 19, 32-35, 37, 39-53, 59, 62-64, 71, 79, 81, 83, 87-90, 92-93, 96-98, 101, 103-104, 106, 108-109, 111, 113-115, 117, 123-124, 127, 129-131, 133, 142, 153, 157, 187-191, 198-200, 203-208 Shares 2, 4-5, 9-10, 12, 15-16, 19, 25, 27, 29, 33-35, 37-38, 43, 46, 49, 51-73, 78, 83-84, 86-99, 108-109, 123, 130-131, 133, 166, 177, 187, 191-192, 198, 203, 205, 207 Shelf company (-ies) 24-25 Splits 210 Stock exchange (Vilnius stock exchange, VSE) 2, 5, 65, 67-70, 144 Subsidiary (company) 20, 51, 73, 105, 126 Supervisory board (Supervisory council) 5, 13-14, 19, 43, 45-46, 52, 79, 101, 103-106, 108, 113, 122-127 Tax havens 161-162, 166 Taxable entity 158-160, 166 Transfer of shares 60-61, 63-64, 92, 177 Transfer of voting right 50 Ultra vires 1, 108, 121 Uzˇdaroji akcine˙ bendrove˙ (UAB, private company) 2, 8, 30, 74 Value added tax (VAT) 22, 176-178, 181-183, 186 Voting right(s) 47, 50-52, 58 Withholding tax 165, 166

Character of UAB and AB

Lithuanian company law is based on the principles of OECD and implements EU law 1 rather fully: from the waiver of ultra vires doctrine to implementation of recent European Directive on Takeover Bids and enforcement of national regulations necessary for establishment and operation of the European companies Societas Europeae (SE). Under Lithuanian law the following types of companies may be established: (i) a pri- 2 vate limited liability company (uzˇdaroji akcine˙ bendrove˙ or UAB) or (ii) a public limited liability company (akcine˙ bendrove˙ or AB). Shareholders of both types of companies are liable only to the extent of the amounts due to be paid for their shares in a company. However, if a company becomes unable to perform its obligations due to unfair actions of a shareholder, the shareholder may be subsidiarily liable for the obligations with his personal property. In a private company the number of shareholders may not exceed 249 and its shares may not be traded publicly, while in public comRolandas Valiu¯nas and Dovile˙ Burgiene˙

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I. Character of UAB and AB

panies there are no limitations in respect of the number of shareholders and shares of public companies may be listed on the stock exchange and traded publicly. 3 Generally, Lithuanian private company is analogous to German GmbH, French SARL or BV in the Netherlands and public company accordingly to German AG, French public SA and NV in the Netherlands. Private and public companies are the most significant forms of legal entities in Lithuania, biggest part of business activities are conducted through them. 4 While there are around 24,830 active private companies in Lithuania, the number of active public companies is only about 580. This shows that private companies are much more popular. Public companies are more suitable for big business organisations with multiple shareholders and the need to attract public finance by placing securities (shares and (or) bonds) on financial markets. 5 The main differences between the public and private companies would be the following: Public companies

Private companies

Authorised share capital

Public company must have a minimum share capital of LTL 150,000 (app. EUR 43,443).

The share capital of a private company must be at least LTL 10,000 (app. EUR 2,896).

Number of shareholders

The number of shareholders of a public company is not limited.

The number of shareholders of a private company must not exceed 249.

Capital financing rules

A public company must register its shares and other securities issued with the Securities Commission of the Republic of Lithuania, the supervisory authority of the securities market established by the Government (with a few certain exceptions upon which the shares need not to be registered). The shares of a public company may be publicly traded and listed on the stock exchange.

A private company cannot publicly trade in securities.

Debt financing

Public companies may issue bonds and publicly market or trade in them.

Private companies may issue bonds, however may not publicly market or trade in them.

Management structure

Public companies must have a general meeting of shareholders and a chief executive officer (CEO). Whilst it is not compulsory, it is common for public companies also to form (i) a supervisory council and (or) (ii) a board of directors.

Private companies must have a general meeting of shareholders and a chief executive officer (CEO). The laws allow to form supervisory council and (or) a board of directors in private companies as well, however in practice usually only the board of directors is formed, if any, and only in major private companies.

Audit

An auditor must review the annual financial statements and report on the company’s activities in all public companies.

Audit is only mandatory if at least two of the following conditions are satisfied: – the annual net sales revenue exceeds LTL 10 million (EUR 2.9 million);

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1. Formation procedure

Lithuania

Public companies

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Private companies – the average annual number of listed employees exceeds 50; – the value of the assets indicated in the balance sheet exceeds LTL 5 million (EUR 1.45 million).

Shares

All shares of a public company must be issued in a non-material form, i. e. they are recorded in personal securities accounts of shareholders which are managed and maintained by the authorised trading intermediaries.

A private company may issue either non-material or material shares (the latter may be replaced by share certificates). Non-material shares of a private company are recorded in personal securities accounts of shareholders which are managed and maintained by the company itself or by authorised trading intermediaries.

The formation and operation of private companies in Lithuania is principally regulated 6 by the 18 July 2000 Civil Code, 11 December 2003 Law On Companies (the “Company Law”) and other legal acts such as Law on Securities Market, Law on Competition, the Regulations of the Register of Legal Persons etc., which generally comply with the European Union law. Peculiarities of incorporation, activities, reorganisation and winding up of commercial banks, insurance companies and other special types of companies are also regulated by special statutes, such as the Law on Banks, the Insurance Law etc.

II. Formation 1.

Formation procedure

The overall procedure of formation of private and public companies is rather efficient 7 and fast in Lithuania. For instance, two weeks (after the drafting the incorporation documents) are sufficient to form a private company. The step-by-step procedure of incorporation is set out below. a)

execution of the formation documents

The first step in the incorporation procedure is to choose the name of the company 8 under incorporation. The name is not registered separately and is protected from the moment an application for registration of the company is submitted to the Register of Legal Persons. Before application for registration of the company, it is possible to apply to the Register of Legal Persons for temporary registration and protection of the name (for a period of six months). The name of a company must not violate public order or mislead the public (e. g. due to similarity to the names of other legal persons or the trademarks thereof). A company name must include the words uzˇdaroji akcine˙ bendrove˙ or the abbreviations UAB (for private companies), or the words akcine˙ bendrove˙ or the abbreviation AB (for public companies) accordingly, specifying the legal form of the company. Special permission from the Ministry of Justice of the Republic of Lithuania is required for the use of the word “Lithuania” in a company name. Rolandas Valiu¯nas and Dovile˙ Burgiene˙

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9 Every incorporator must sign the incorporation agreement (in the case of a sole incorporator – the act of incorporation) and the articles of association. The incorporation agreement (act of incorporation) is also considered to be a share subscription agreement. The incorporation agreement enables to open the accumulative bank account (designated solely for the collection of monetary contributions to the authorised share capital of the company). 10 All incorporators must subscribe for the shares and become shareholders of the company. After all initial contributions are paid up and, in case of incorporation of a public company an incorporation report must be drafted. The report of the public company should be drafted no later than 10 days before the founding meeting and it should indicate incorporation expenses, amount of paid-up share capital, in-kind contributions to the share capital and value thereof, the number of shares subscribed for by each incorporator, for which he/she has paid the initial contribution, also the number of the shares by classes, incorporation expenses which are subject to reimbursement, remuneration for the incorporation of the company to the incorporators etc. This report must be submitted to the Register of Legal Persons together with all other necessary documents. There is no requirement for the private companies to prepare the incorporation report. 11 After payment of initial contributions to the authorized capital, incorporators must convene the founding meeting. The founding meeting approves the articles of association and elects members of the company body which is formed by the general meeting of shareholders. 12 According to the Company Law, Lithuanian companies may have a four-tier structure (the general meeting of shareholders, the supervisory council, the board (of directors) and the Chief Executive Officer (the CEO). It is not obligatory to form the supervisory council and/or board in a company. Supervisory councils rarely occur in private companies, but boards are formed quite often, particularly in the larger private companies. If neither the supervisory council nor the board is formed, the founding meeting shall elect the CEO of the company. 13 If the supervisory council is formed in the company, the members of the council elected by the founding meeting must elect the chairman of the supervisory council and the members of the board. Afterwards the newly elected members of the board must elect the chairman of the board and appoint the CEO of the company. 14 If the supervisory council is not formed, the members of the board elected by the founding meeting must elect the chairman of the board and appoint the CEO of the company. b)

initial shareholder contributions and their payment prior to registration

15 After signing of the incorporation agreement (act of incorporation), an accumulative account has to be opened in one of the Lithuanian banks. The accumulative account is opened solely for the purpose of collecting initial monetary funds to the authorised 510

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2. Registration procedure/the commercial register

Lithuania

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(share) capital of a company, and funds in this account may not be used prior to the registration of the company (after the company is registered, the account is transformed into an ordinary settlement account and funds in the account may be used). The minimum authorised (share) capital for a private company is LTL 10,000 (app. EUR 16 2,896) and LTL 150,000 (app. EUR 43,443) for the public company. If the minimum authorised capital is formed, the total amount of LTL 10,000 in case of private company and LTL 150,000 in case of a public company has to be paid in cash. When establishing a company with the authorised capital above minimal share capital, the incorporators may choose not to form the entire capital before the company’s registration, i. e. to contribute at least 25% of the issue price of all the company’s shares (but not less than the minimum capital amounting to LTL 10,000 for private and LTL 150,000 for public companies) in cash before registration, and then to pay the remaining part of the issue price for the subscribed shares within 12 months from signing the incorporation agreement (act of incorporation). Initial contributions made by each incorporator before the registration of the company must be not less than 25% of the issue price of the subscribed shares. Should a part of the remaining authorised capital be paid by in-kind contributions, such in-kind contributions have to be evaluated by experts certified under Lithuanian law prior to signing the incorporation agreement (act of incorporation), and value of the in-kind contribution must be indicated in the incorporation agreement (act of incorporation). Certain capitalisation requirements apply to companies formed in Lithuania. The total 17 own (equity) capital of a company may not be less than 1/2 of the authorised capital specified in the articles of association.

2.

Registration procedure /the commercial register

The final step in the incorporation procedure is the filing of documents to the notary 18 public for verification and approval, and subsequent submission of the documents for registration to the Register of Legal Persons. Before filing incorporation documents to the Register of Legal Persons, they must be 19 presented for verification and approval to the notary public. Notary public verifies if the articles of association and other incorporation documents follow the formal requirements of the laws and if the necessary authorised capital has been contributed. After the verification and approval, the following documents must be filed for the company to be registered: – an application indicating the required registration data, such as the company name, registered office; the name, position, address and personal registration number of CEO, powers granted to him, date of appointment, specimen signature; the financial year, term of activities of the company; names, addresses and personal registration numbers of members of the board and the supervisory council, powers

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–

– – – – –

Lithuania

II. Formation

granted to them, dates of appointment; data of the sole shareholder (name, address and personal registration number of a natural person or name, legal form, code, address of a legal person); rules of representation of the company (i. e. collective representation rule, if any); consent of the owner of the premises to use the premises as a registered office of the company or a copy of the document certifying the founder’s title to such premises; a document certifying payment of the registration fee (LTL 120 (app. EUR 35)); the agreement (deed) of incorporation and articles of association; certification of the bank that the initial contributions have been paid up; minutes of the founding general meeting of shareholders and a list of participants thereof; an evaluation report concerning contributions-in-kind (if any) and other.

20 In order to register a subsidiary of a foreign company, a notarised copy of the registration certificate of the founder or an extract from the relevant foreign company register and a document confirming the decision to invest by the foreign company must be additionally submitted.

3.

Approval requirements

21 As it was indicated above, incorporation documents must be presented for certification to the notary public and registered with the Register of Legal Persons. 22 After the incorporation (and a company is incorporated upon the registration with the Register of Legal Persons) the company has to register with the State Tax Inspectorate for tax purposes and SODRA (State Social Insurance). Moreover if a company’s income from supplied goods and services within last 12 months exceeds LTL 100,000 (app. EUR 28,970) it has to additionally register as VAT payer (except for certain cases). Registration can also be done in advance, if it is foresee that such income will be received. 23 There are no more special approval or registration requirements from any state authorities except for licences and permissions to perform specific activities (financial services, pharmaceutical activities etc.) or in case the company wants to use the word “Lithuania” in the firm name (the permission from the Ministry of Justice is necessary).

4.

Shelf companies

24 Shelf companies are not popular in Lithuania, however allowed by the laws. However, it should be also noted that the Registrar of the Register of Legal Persons has the right to initiate liquidation of not operating companies. The grounds for such initiative comprise failure to renew the company’s data in the Register within five years and where there are grounds to presume that the company has stopped its activities; also where the company failed to file the documents of financial statements for a period exceeding two years and failed to inform the Registrar of the Register of Legal Persons about the 512

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5. Cost/Duration

Lithuania

25

reasons thereof; or where the management bodies failed to make decisions due to the lack of quorum after the resignation of the members of the managing bodies of the company and the situation persists for more than six months; and lastly where members of managing bodies of the company may not be contacted for more than six months at the registered office of the company or the addresses which have been registered with the Register of Legal Persons. Generally, nowadays a company in Lithuania may be incorporated rather quickly. Upon 25 necessity a private company may be incorporated within two to three weeks. For incorporation of a public company several more weeks may be needed. Therefore, the interest in shelf companies is not considerable. It is more efficient to establish a new company, than to purchase the shares of a shelf company.

5.

Cost/Duration

The overall incorporation procedure comparatively is not costly, however it should be 26 noted that the laws stipulate for the minimum authorised capital of LTL 10,000 (app. EUR 2,896) for private companies and LTL 150,000 (app. EUR 43,443) for public companies. Generally the following fees are applied in Lithuania in relation to registration of a 27 private or a public company: – stamp tax for preliminary registration of a company name of LTL 30 (app. EUR 9) (preliminary registration is only optional – it is possible to apply for registration of the company without preliminary registration of the name); – notary fees for examination of incorporation documents of LTL 350 (app. EUR 102); – stamp duty for registration of the company with the Register of Legal Persons of LTL 120 (app. EUR 35); – in case upon incorporation of the public company the shares have to be registered with the Securities Commission, the stamp duty for registration amounts to LTL 500 (app. EUR 145). Additional notary fees may apply for certified copies of certain documents (e. g. required 28 for the bank, the tax inspectorate). The incorporation procedure, after the drafting and signing of all incorporation docu- 29 ments is rather concentrated and efficient. The shares of a public company have to be registered with the Securities Commission (with certain specific exceptions, for instance, in case issued shares are offered to definite number (not more than 100) of persons) which takes up to two weeks. Notary public has to examine the incorporation documents (of both public and private companies) within 10 days (in practice it takes about a week). Afterwards the company is registered with the Register of Legal Persons within 5 days.

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6.

Requested information on business letters

III. The shareholder

30 The Lithuanian laws stipulate that the documents of a company used in its business relations with other persons (business letters, invoices, trade documents etc.) have to indicate the following information: – company (business) name; – legal form of a company (i. e. UAB or Uzˇdaroji akcine˙ bendrove˙; AB or Akcine˙ bendrove˙); – registered office; – code of a company; – register where the registration data on the company is maintained; and also – where a company has declared bankruptcy or is under liquidation the information thereof must be indicated; – where a company has to pay value-added tax, the payer’s code has to be indicated; – where the assets of a company are mentioned in the documents, authorised capital and the amount of paid-in authorised capital has to be indicated as well. 31 Under the Code of Administrative Violations of Law fines up to LTL 1000 (app. EUR 290) for not obeying the requirement to indicate the above information in the documents may be imposed on CEO, however in practice they are rarely applied.

III. The shareholder 1.

Rights and duties of a shareholder

32 When referring to corporate governance concepts of instrumental (where a company is understood as an instrument for creating welfare of the shareholders) and institutional (where a company is understood as association of all participants (shareholders, employees, management, creditors etc.) seeking to safeguard the interests of the company and continuation of its economic activity) it should be noted that in Lithuania the concept of a company should be described as a mixture of institutional and instrumental, where the institutional concept prevails. However in some cases the practical functioning of the companies shows tendency towards the instrumental concept as well. This means that a company is not perceived only as a device for creating shareholders’ value. Rather, it is considered as an autonomous economic entity instituting a coalition of various participants, such as shareholders, corporate management, employees and other participants striving for the continuity of the firm as a whole. However due to the large ownership concentration, majority shareholders exercise decisive influence in the decision making process – electing their representatives to the management bodies in order to implement their interests and strategies directly. 33 Shareholders’ rights are provided for in the laws and articles of association, however they may be limited solely in cases provided for by the laws or by the court decisions (the articles of association may not provide any obstacles to exercise those rights 514

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1. Rights and duties of a shareholder

Lithuania

34

established by the laws). Shareholders have no proprietary obligations with respect to the company, except payment for the shares subscribed for. Generally, the rights of shareholders are divided into proprietary and non proprietary. Proprietary rights include the following rights: – to receive a share of the company’s profit (dividend); – to receive a share of the company’s assets on winding up; – to receive shares of the company free of charge if the authorised share capital is increased from company reserves, except for the owners of preference shares in cases of increase from profit or reserves formed out of profit; – pre-emption rights to acquire shares or convertible bonds issued by the company, except if such rights of all shareholders are revoked by the shareholder’s meeting; – to lend money to the company following requirements established by the laws; and – other rights.

34

One of the fundamental rights of the shareholder is a right to a dividend. Net annual 35 profit is distributed by the annual shareholder’s meeting. A dividend is a part of profit allocated to a shareholder in proportion to the par value of his shares. If the share is not fully paid up, the dividend is reduced accordingly. If the share is not fully paid up and the term of payment has expired, the dividend is not paid. Dividends may not be allocated and paid out: – if the equity capital is, or would fall, below the amount of authorised share capital and reserves; – if the company is, or would, become insolvent; or – if the losses are accounted in the balance sheet of the company.

36

Dividends allocated by the shareholder’s meeting are an obligation of the company to 37 pay, which must be performed within one month from the date of allocation. Dividends must be paid in cash and advance payment is prohibited. Dividends already paid may be reclaimed only if the shareholder knew or must have known that the payment was illegal (i. e. contrary to mandatory provisions of the Company Law). There are two types of shares: ordinary and preference, which differ in the scope of the 38 rights granted, however most of the companies choose to have only ordinary shares. Owners of preference shares have a priority in receiving dividends. If the part of the company’s profit appropriated for dividends is not sufficient to pay all dividends of preference shares, all owners of preference shares receive a proportionately lower dividend. Preference shares are of two types, with a cumulative dividend or without it. An unpaid dividend attached to preference shares with a cumulative dividend is carried forward to the next year. A right to a part of assets on winding up is also significant. Where a company is wound 39 up, assets left after the settlement with the creditors are distributed to the shareholders in proportion to the par value of their shares. If the shares grant different rights to their owners, due account should be taken of such differences. Owners of preference shares Rolandas Valiu¯nas and Dovile˙ Burgiene˙

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III. The shareholder

with a cumulative dividend have priority to exercise their rights to receive the accrued dividend upon liquidation. 40 In any case, distribution of assets may not commence earlier than two months after the date of due notification to creditors and shareholders. Upon settlement with at least one shareholder, the general meeting of shareholders loses the right to revoke winding-up proceedings. 41 Meanwhile non-proprietary rights of the shareholders are the following rights: a) to take part and vote in the general meeting of shareholders; b) to receive information regarding activity of the company; c) to challenge in court the decisions of the general meeting of shareholders, the supervisory council, the board and the CEO; d) to apply to court with a claim for compensation of damage made to the company through failure to fulfil or improper fulfilment of the obligations of the members of the board or the CEO of the company, and in other cases established by laws; e) to assign the right to vote at the general meetings of shareholders to any third person; and other rights provided for in the laws and articles of association.

2.

Shareholder resolutions /shareholder meetings

42 The general meeting of shareholders is the supreme body among company’s corporate bodies. The meeting is the only corporate body competent to make decisions on many essential matters of the company. 43 The exclusive competence of the general meeting of shareholders includes: – amendments to the articles of association; – election and dismissal of an audit company (and determination of its remuneration), members of the supervisory council, if the supervisory council is not formed – members of the board, if neither the supervisory council nor the board is formed – CEO; – approval of annual financial statements and report on the company’s activities presented by the board (or, if the board is not formed, by CEO); – increase and reduce of the authorised share capital, except where otherwise provided for in the laws; – issuance of shares and convertible bonds, determination of the class, number, par value and minimum issue price of shares to be issued, as well as revocation of shareholders’ pre-emption rights, acquisition by the company of its own shares, conversion of the class of shares and determination of conversion rules, change of certificates of a private company to shares; – winding up, change of legal form, restructuring and reorganisation of the company, election and removal of liquidator and approval of reorganisation plan; – distribution of profit, formation, use, reduction and cancellation of reserves. 44 The general meeting of shareholders may not authorise other management bodies to make decisions on the issues assigned to its exclusive competence. 516

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2. Shareholder resolutions /shareholder meetings

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45

The general meeting of shareholders may be convened on the initiative of the super- 45 visory council, the board (if it is not formed – CEO), or shareholders holding at least 10 % of the votes (the articles of association may provide for a lower threshold). A decision on the convocation of the general meeting of shareholders is adopted by the board, or – if it is not formed, is not full or fails to convene the general meeting of shareholders – by CEO. If the initiators of a general meeting of shareholders do not obtain a favourable decision of the board or CEO, the general meeting of shareholders may be convened by the resolution of the shareholders possessing more than half of all the votes. The general meeting of shareholders may also be convened by a decision of the court if it has not been convened when such convocation is mandatory or the initiative of the convocation has been declined by the board or CEO. There are certain situations where convocation of the general meeting of shareholders is 46 mandatory: – within 4 months from the end of the financial year (this annual meeting inter alia approves the financial statements and report on the company’s activities); – when the equity (own) capital falls below 50 % of the authorised share capital; – when the number of members of the supervisory council or board falls below 2/3 of the number indicated in the articles of association or the minimum number thereof provided for in the law; – when CEO elected by the general meeting of shareholders resigns or is unable to carry out his obligations; – when an audit company terminates its contract with the company or is unable to carry out an audit of the company for any other reasons (provided the audit is mandatory); and – where the term of the company’s activities indicated in its articles of association expires (however, as a general rule articles of association stipulate for unlimited term of company’s activities). CEO must notify all shareholders about the general meeting of shareholders in the 47

newspaper indicated in the articles of association or personally (by recorded delivery) or via registered mail at least 30 days before the meeting. This term may not be observed if every shareholder of the company having voting right agrees with that in writing. Notification must, inter alia, specify the time, place and agenda of the meeting. Shareholders are entitled to familiarise themselves with all the documents of the company relating to the agenda of the meeting. The agenda of the general meeting of shareholders is drafted by the body which has 48 made a decision to convene the meeting (except for certain cases). Bodies and persons having a right of initiative to convene a meeting also have a right to propose issues on the agenda (such proposed issues must be included in the agenda), draft decisions of the general meeting of shareholders or candidates to positions in company management bodies. All persons who possess at least one company’s share on the day of the general meeting 49 of shareholders may participate in the meeting. A general meeting of shareholders may Rolandas Valiu¯nas and Dovile˙ Burgiene˙

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Lithuania

IV. UAB-share and AB-share

pass resolutions if a required quorum of 1/2 votes held by the shareholders is present. Because of the high ownership concentration in Lithuanian companies the problem of not having a quorum is rather exceptional. However, if the quorum is not present, a repeated general meeting of shareholders is convened not earlier than within five days and not later than within 30 days after the initial meeting, which is entitled to make decisions irrespective of the number of shareholders present. 50 Voting in the general meeting of shareholders is open. However, shareholders representing more than 10% of the votes may require a secret voting, which in such case is mandatory for all the shareholders. Shareholders may also issue a power of attorney for other persons to vote for them or may transfer their voting right. 51 If all shares with voting rights attached are of the same par value, each of them confers one vote. The articles of association may provide that some classes of preference shares do not confer voting rights. If shares with voting rights are of different par values, shares of the lowest par value confer one vote. The number of votes conferred by other shares is equal to the ratio between their par value and the par value of shares with the lowest par value. A shareholder, unless he has acquired all the shares of the company, may not vote on the revocation of shareholder pre-emption rights in favour of himself, his close relatives, his spouse, or close relatives of the spouse (in the case of a natural person) and parent or subsidiary (in case of a legal person). 52 The resolutions of the general meeting of shareholders are passed by a simple majority of votes received in favour of the particular decision, except for the following cases: – when the members of the supervisory council or board are elected. In such case, cumulative voting applies (i. e. the number of votes conferred on each shareholder is equal to the number of votes determined by general rules multiplied by the number of candidates. A shareholder has full discretion to distribute his votes amongst one or more candidates. The candidates for whom most of the votes have been cast are elected); – a 2/3 majority is required for amendments to the articles of association, an increase and decrease of authorised share capital, determination of class, number, par value and minimum issue price of shares issued by the company, winding up, change of legal form, restructuring or reorganisation of the company, distribution of profit and certain other decisions; – a qualified 3/4 majority is required for revoking pre-emption rights of shareholders to acquire newly issued shares or convertible bonds of the company.

IV. UAB-share and AB-share 1.

Classes of shares

53 Shares are proprietary securities certifying their owner’s share in the authorised capital of the company and granting him/her proprietary and non-proprietary rights. Shares may be issued in two forms: as material shares – printed documents in the form of share certificates, or non-material shares – represented by records in the personal securities 518

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54

accounts opened to each of the shareholder. Material shares may only be issued by private companies, however in general are rarely used. Shares must be issued with their par value indicated. Par values must be indicated in 54 round numbers of LTL. Par values of all ordinary shares and (or) shares of the same class must be equal. The minimum par value of one share is 1 (one) LTL. Shares of the same type based on the rights granted may be subdivided into classes. 55 Based on the rights granted, shares may be subdivided into ordinary and preference shares. Preference shares grant a right to a fixed amount of dividend, irrespective of the actual annual profit of the company. Owners of preference shares have a statutory priority to exercise their property rights in a dividend and a share of a wound up company’s assets. Property and non-property rights granted by preference shares must be established prior to their issuance and included in the articles of association of the company. The par value of all preference shares of the company may not exceed 1/3 of the authorised share capital. The articles of association must indicate a constant (non-variable) amount of dividend 56 expressed as a percentage of the par value of the preference share. Preference shares may have a cumulative or non-cumulative dividend. If the part of the 57 annual profit appropriated for dividends is not sufficient to pay the dividend on preference shares, all owners of preference shares are paid proportionately to the nominal value of their shares. The unpaid amount of the cumulative dividend is transferred to the next financial year. In order to counter-balance proprietary preferences, articles of association may restrict 58 voting rights of preference share owners. If the cumulative dividend is not paid up in full for two consecutive years, the owners of preference shares with a cumulative dividend re-acquire voting rights for the period until the end of the year in which full settlement is effected. Ordinary shares may not be converted into preference ones. Preference shares may be 59 converted into ordinary shares at the general meeting of shareholders by a 2/3 qualified majority vote of the owners of every type of shares. In case of conversion of preference shares with a cumulative dividend, a company must pay all outstanding dividends or undertake to settle them within the next financial year. The laws also stipulate for employee shares which are ordinary shares allocated to the 60 employees of the company on preferential terms. They may only be issued on full payment for shares subscribed at incorporation. Transfer of employee shares may be limited by a share subscription agreement for up to 3 years from the date of issue. On the expiry of this period of limitation a share loses its employee share status and is converted into an ordinary registered share. However this type of shares is not common in Lithuania.

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2.

Transfer of shares

IV. UAB-share and AB-share

61 Only fully paid-up shares may be transferred. Different methods of transfer must be used depending on the type and form of the shares: – material shares and share certificates are transferred by formal written endorsement on the share or certificate (however it was mentioned above that such shares may only be used in private companies); and – non-material shares are transferred by crediting the securities account of the purchaser and debiting the securities account of the seller. If certain information, such as par value and number of every type and class of shares is absent in the share sale and purchase agreement, records of the transfer may not be made. 62 In the event the shares of a private company are sold, the seller must notify the CEO of the company in writing about the intent to sell the shares in order other shareholders could exercise their pre-emptive right to purchase the shares. Accordingly, other shareholders of a private company have pre-emption right to acquire all shares offered for sale for the price indicated in the seller’s notification sent to the company (unless the articles of association provide otherwise). Therefore, the CEO of a company within 5 days from the date of receipt of the shareholder’s notification must notify other shareholders about the sale and the term (from 14 to 30 days) to exercise pre-emption rights. If the seller is not notified about the exercise of pre-emption rights, he is entitled to sell the shares for a price not less than that indicated in the notification sent to the company. 63 It should be noted that as a result of any transfer of shares, the number of shareholders of a private company may not exceed 249. 64 Meanwhile, the public companies are prohibited from introducing any restrictions of the shareholders right to transfer fully paid shares. 65 Shares of the public companies may be listed on the Vilnius Stock Exchange (VSE) which is the only regulated securities market in Lithuania, offering trading, listing and information services. Public companies may be listed on Official or Current Trading Lists. Shares and their issuers (i. e. companies) are subject to different listing requirements depending on the trading list, in which they are traded. In order to be listed on the Official List the shares have to be registered with the Securities Commission for public trading, fully paid-up and a general account has to be opened for these shares with the Central Securities Depository of Lithuania. Market capitalization of shares or, if it is impossible to determine the market capitalization, the company’s capital and reserves, including profit or loss, of the preceding financial year should be least EUR 2.9 m. Also there is a requirement that the sufficient amount of securities have been distributed (not less than 25% of the authorized capital has been publicly distributed or a smaller percentage that is sufficient to ensure proper functioning of the market) and that the shares are freely negotiable and entitling their holders to equal rights. Financial statements of the company to be listed of the three preceding years should have been audited in accordance with the International Standards on Auditing. Listing particulars or prospectus, prepared in accordance with the requirements estab520

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lished by the Securities Commission, have to be published. Also there is a requirement that the company to be listed would have been operating profitably in the preceding financial year. Certain additional regulations also apply. The requirements to be listed on the Current List are of less strict character. Again the 66 shares of the company to be listed have to be registered with the Securities Commission for public trading, fully paid up and a general account is opened for these securities with the Central Securities Depository of Lithuania. The company’s capital and reserves, including profit or loss, of the preceding financial year should be at least EUR 1 m. Furthermore there is a requirement that sufficient amount of securities have been distributed (no less than 25% of the authorized capital has been publicly distributed or a smaller percentage that is sufficient to ensure proper functioning of the market). The shares have to be freely negotiable and entitling their holders to equal rights. Certain additional requirements also apply. A public company seeking to have its shares admitted to the trading lists of VSE must 67 file an application to the board of the Stock Exchange taking an obligation to comply with the Trading Rules of the Stock Exchange and other documents referred to in the Trading Rules of the Stock Exchange. The board of the VSE may request that the company submit additional documents or information if they believe that it is necessary for the protection of investors. The board of the VSE adopts a decision to admit securities into the trading list if the 68 issuer and its securities comply with the requirements set out in the Trading Rules of the Stock Exchange. The decision to refuse admission of securities to the trading list is adopted if the shares in question or the company do not comply with the requirements set out in Rules or if the company seeking to be listed on the Official or Current List refuses to submit the requested additional information or the board of the Stock Exchange believe that listing of the company’s shares may be detrimental to the interests the investors because of the company’s current position. Also a decision concerning a qualified admission of the shares into the trading list may 69 be adopted if at the time of filing the application the company’s shares do not comply with the requirement of a public offering as stipulated in the trading rules, but the public company provides the board of the Stock Exchange with the information specified in the trading rules, on the basis of which the board of the Stock Exchange conclude that the company will fulfil the conditions set out in the decision within the certain term and consequently the company will be in compliance with all the requirements. Decisions concerning admission of securities to the Official List must be adopted within 70 6 months and to the Current List within 1 month of receipt of the application or the missing additional documents by the VSE.

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3.

Own shares

V. Articles of Association

71 A company may acquire its own shares, however certain regulations of the Company Law of the Republic of Lithuania should be followed: – the par value of all own shares to be owned by the company does not exceed 1/10 of the authorised share capital; – the shareholder equity does not fall below the amount of the authorised share capital, the mandatory reserve for the acquisition of own shares; – the shares to be acquired are fully paid up; – a reserve for the acquisition of the own shares has been formed; and – a relevant decision of the general meeting of shareholders indicating the purpose and term (not exceeding 18 months) of the acquisition, maximum amount of the shares to be acquired, the maximum and minimum price of shares, as well as the order of sale and minimum sale price of own shares, has been made. 72 Notably, public companies in order to purchase own shares have to submit a voluntary tender offer according to the procedure laid down in the legal acts regulating the securities market. 73 Acquisition of shares by a subsidiary or by a person acting in the interests of the company and using funds of the company constitutes acquisition of own shares by the company itself. A company may not exercise proprietary and non-proprietary rights attached to its own shares. Moreover, a company may not directly or indirectly pay in advance, make a loan or secure performance, if such acts are directed to the creation of favourable conditions for third parties to acquire the shares of the company.

V.

Articles of Association

1.

Mandatory content

a)

company name

74 The articles of association are the basic constitutive document of the company. Articles of association must contain certain provisions including name and legal form of the company. The name must not violate public order or mislead the society (e. g. due to similarity to the names of other legal persons or the trademarks thereof). A company name must include the words uzˇdaroji akcine˙ bendrove˙ (private company) or the abbreviation UAB or akcine˙ bendrove˙ (public company) or (AB) accordingly, specifying the legal form of the company. Special permission from the Ministry of Justice is required for the use of the word “Lithuania” in a company name.

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2. Additional provisions of the articles of association

b)

Lithuania

75

registered seat

The articles of association must include the registered office (registered seat) of the 75 company. Registered office is defined by indicating the address of the premises in which the head office is located. It should be noted, than Lithuanian company law, according to EU company law 76 tendencies, follows the principle of incorporation in contrast to the actual company seat principle. This means that the company is deemed to have legal capacity (may obtain all rights and duties stipulated in Lithuanian laws) after the company is duly incorporated in Lithuania. There is no requirement for the company that the main business place were or the management resided in Lithuania. c)

business objective

The articles of association must also contain purposes of activity of the company and 77 object of economic activity. Usually they are indicated according to the national statistical classification of economic activities prepared on the basis of the EU NACE classification. d)

share capital and amount of shareholder contributions

Authorised share capital, number, par value and rights granted by shares according to 78 their class must also be indicated in the articles of association.

2.

Additional provisions of the articles of association

The articles of association of the company must also stipulate for: – competence of general meeting of shareholders and rules for convening it; – competence and rules for appointment and dismissal of supervisory council, board and CEO of the company; – rules for publication of company information and provision thereof to shareholders; – rules for decisions on establishment of branches and representative offices; – duration of the company, if established for a limited period of time; and – rules for amendment of the articles of association.

79

Articles of association may contain other provisions as long as these comply with all 80 relevant legislation.

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Lithuania

3.

Amendment of articles of association

a)

formally recorded shareholder resolution

V. Articles of Association

81 Any amendments on the articles of association are adopted by the decision of the general meeting of shareholders by 2/3 majority vote. Also it should be mentioned that articles of association of the company may stipulate for a higher majority. In event of any amendment, the whole new wording of the articles of association is drafted and approved by shareholders. b)

registration with the commercial register

82 Articles of association and any amendments thereof are valid on registration with the Register of Legal Persons. Prior to the registration the new wording of the articles of association is again examined by the notary public if it complies with the requirements of the laws.

4.

Capital increase/decrease

a)

general information

83 The authorised capital of a company is increased by the decision of the general meeting of shareholders adopted by 2/3 majority vote (notably the articles of association of the company may stipulate for a higher threshold). The approval of holders of non-voting preference shares shall also be necessary for the adoption of the decision to increase the authorised share capital through additional contributions by issuing preference shares. 84 The authorised capital may be increased in one of the following ways: – by issuing new shares; or – increasing the nominal value of the issued shares. 85 The first one is more popular in practice due simplicity and clarity of the procedure. 86 The company may increase authorised capital only after the previous issue of shares has been fully paid up. There is also requirement to inform thereof the Register of Legal Persons within 10 days after the adoption of the decision to increase the share capital. 87 The authorised capital shall be deemed to have been increased only after the amended articles of association are registered with the Register of Legal Persons. The procedure of amending articles of association, described above, has to be followed (the articles of association must be verified by the notary public etc.). The decision of the general meeting of shareholders to increase the authorised capital, shall be deemed to be void in case of failure to submit the amended articles of association to the Registrar of the Register of Legal Persons within 6 months after the day of the general meeting of shareholders which adopted the decision to increase the authorised share capital. If this 524

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4. Capital increase /decrease

Lithuania

88

deadline is not met, the contributions for the subscribed shares must be immediately returned without any deductions at the written request of the subscriber. b)

increase of authorised capital by additional contributions

The authorised capital may be increased by additional contributions of shareholders and 88 other persons only by issuing new shares. It should be mentioned that an insolvent public company may increase its authorised 89 share capital by additional contributions only if the new shares are acquired by its shareholders, employees and creditors. The shareholders of the company exercise pre-emption right to acquire the shares issued 90 by the company in proportion to the par value of shares owned upon the increase of the capital through additional contributions. However, this right may be recalled for all the shareholders by 3/4 majority decision of the general meeting of shareholders (the articles of association may stipulate for a higher majority), such decision may only be adopted only if person (or persons) who will acquire the shares is known. When not all the shares are subscribed for within the period intended for share subscription, the authorised capital may be increased by the amount of nominal values of subscribed shares, if the decision of the general meeting of shareholders which adopted the decision to increase the authorised capital provided for such an option. On the basis of this decision, the board of the company (CEO if the board is not formed) must make relevant amendments to the articles of association relating to the amount of the authorised capital and the number of shares and (or) their par value. The articles of association of the company amended because of the increase of the 91 authorised capital through additional contributions are registered with the Register of Legal Persons after the subscription for shares and payment of initial contributions. c)

increase of authorised capital out of company funds

The authorised capital may also be increased out of the company funds, i. e. the un- 92 distributed profit, share premium or reserves (except for the reserve for acquisition of own shares and the mandatory reserve). The authorised share capital shall be increased out of the company funds by issuing new shares which are transferred to the shareholders without payment or by increasing the nominal value of the previously issued shares. The general meeting of shareholders has to adopt the decision to increase the author- 93 ised share capital out of the company funds on the basis of the financial statements of the company. If the decision of the general meeting of shareholders to increase the authorised share capital is adopted within 6 months after the end of the financial year, the decision may be adopted on the basis of the annual financial statements. In other cases the general meeting of shareholders must receive the interim financial statements drawn up at least 3 months before the general meeting of shareholders. The interim financial statements must be submitted to the Registrar of the Register of Legal Persons Rolandas Valiu¯nas and Dovile˙ Burgiene˙

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V. Articles of Association

together with the documents required under the legal acts for the registration of the amended articles of association. 94 It should be noted that if the balance sheet of the company shows losses, the authorised share capital may only be increased from the revaluation reserve. 95 Where a company is increasing its authorised capital out of the funds of the company by issuing new shares, the shareholders holding ordinary shares, shall be entitled to receive new ordinary shares without payment, the number whereof would be in proportion to the par value of the shares owned by them. Only in case the authorised capital is being increased from the share premium or the revaluation reserve, the holders of both preference and ordinary shares shall have equal rights to receive new shares. d)

capital decrease

96 The general meeting of shareholders may decide to decrease the authorised share capital either: – by reducing par values of shares; or – by cancelling shares. 97 The reduced capital should not fall below the required minimum amount of authorised capital (LTL 10,000 (EUR 2,896) for a private and LTL 150,000 (EUR 43,443) for public companies). A qualified 2/3 majority vote of the general meeting of shareholders is required. If there are several types or classes of shares issued, a separate approval by a qualified 2/3 majority vote of owners of every type and class of shares (including non-voting shares) is required. A decision must be duly disclosed, published or handed in person by recorded delivery to every shareholder or notified by registered mail. 98 Every creditor must also be notified by recorded delivery or by registered mail regarding the reduction and may request additional security of performance, unless: – total amount of creditor claims does not exceed 1/2 of the shareholder equity capital after reduction of the authorised capital; – creditor claims are already secured by sufficiently credible means, such as pledge, hypotheque (mortgage) or guarantee; or – authorised share capital is being reduced solely to cover the losses. 99 The authorised share capital is reduced upon registration of the accordingly amended articles of association with the Register of Legal Persons. Reduction of the authorised share capital may be presented for registration not earlier than 3 months from the date of announcement by the Register of Legal Persons of the decision to reduce the authorised share capital, unless the company has no debts and has publicly announced the reduction of the authorised share capital; the authorised share capital is being reduced to cover the losses; or the authorised share capital is being reduced to correct errors that occurred during its formation or increase.

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1. Managing directors

Lithuania

100

It should be noted that in case of the capital increase or decrease, the articles of 100 association must be amended (as the amount of the authorised capital is indicated therein).

VI. Management board 1.

Managing directors

According to the Company Law, Lithuanian companies may have a four-tier structure 101 (the general meeting of shareholders, the supervisory council, the board and CEO. It is not obligatory to form the supervisory council and (or) board in a company. Supervisory councils are rarely formed in private companies, but boards are formed quite often, particularly in the larger private companies and public companies. The articles of association of a company regulate: – whether the supervisory council and the board shall be formed; – number of members of the supervisory council and (or) the board (minimum number is 3, maximum number of members of the supervisory council is 15 and the maximum number of members of the board is not regulated); – term of election of the supervisory council and (or) the board (maximum term is 4 years); – rules of the representation of the company (collective representation of the company, if any).

102

Every company must have a head of the company – CEO – who leads the day-to-day 103 management of the company. CEO is appointed by the board or supervisory council (if the board is not formed) or the general meeting of shareholders (if neither the Council nor the board is formed). Appointment and dismissal must be notified to the Register of Legal Persons. Only a natural person may become CEO. CEO must enter into an employment contract with the company. The number of members of the board is provided in the articles of association, but in 104 any case cannot be less than 3. Members of the board are elected by the supervisory council or general meeting of shareholders, if the supervisory council is not formed (in such case the election proceeds according to the rules established for the election of supervisory council members). A member of the supervisory council of the company, its subsidiary or parent company 105 may not be a board member, along with persons prohibited to hold such office by the law. Data of the board members and subsequent changes thereof are subject to registration with the Register of Legal Persons. Supervisory council or, respectively, general meeting of shareholders (if the supervisory 106 council is not formed) may dismiss the whole board in corpore or dismiss any member

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Lithuania

VI. Management board

prior to the expiry of the term of his /her office. A member of the board may resign upon written notification to the company at least 14 days in advance.

2.

Management and representation

107 Management of a company is generally performed by CEO and the board, if it is formed within the company. 108 The competence of CEO is rather wide and includes: – Management powers: CEO appoints and dismisses employees of the company, directs the day-to-day management of the company, is responsible for compliance of company activities with the laws as well as for full and correct accounting. – Decision-making powers: CEO has general decision-making powers in the field of company management, except for decisions specifically assigned to the competence of the board, supervisory council or general meeting of shareholders. He must follow the articles of association, and decisions of the supervisory council, the board and the general meeting of shareholders. – Representation powers: CEO represents the company in relationships with third parties as well as in court or during arbitration proceedings, subject to the requirement of relevant decisions of the board (e. g. in the case of transfer of a long-term asset the value of which exceeds 5% of the authorised share capital). Contracts and other transactions executed by CEO ultra vires are binding on the company except if the counter-party knew or should have known that the transaction was entered into by a non-authorised CEO. An exception to this rule is in the case of registered collective representation of the company. Such collective representation may only provide for representation of the company by CEO and member(s) of the board who have the right to sign on behalf of and in other way jointly represent the company. 109 The board of the company has statutory management powers in several other areas: – Strategic management of the company: it deliberates on and approves the strategy of the company, the company’s management structure and positions, the occupation of which is subject to contest, salary, other terms of employment and work regulations of CEO, and the regulations of branches and subsidiaries. It appoints and dismisses CEO. – Supervision of the day-to-day management: the board analyses and evaluates material presented by CEO on: (i) implementation of the strategy of the company, (ii) organisation of the activities of the company, (iii) financial situation of the company, and (iv) results of business activities, estimates of income and costs, data of inventory and other accounting of valuables. – Administration of the general meeting of shareholders: the board is responsible for a timely convocation of the meetings, comprising agendas, submission of annual financial statements, profit distribution projects and reports on the company’s activities. 528

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3. Responsibilities and personal liability of managing directors

Lithuania

110

– Decision-making within the company: the board makes decisions for the company to become an incorporator or shareholder (owner) of other enterprises, to establish branches of the company, to invest, transfer, lease or pledge the long-term assets of the company, the total balance sheet value of which exceeds 5% of the authorised share capital (counting separately for each type of transaction) or to secure the obligations of third parties exceeding this threshold or to acquire long-term assets for a higher price, as well as to restructure the company. The articles of association may provide for a requirement of approval of certain of these decisions, by the general meeting of shareholders. In case the board is not formed in a company, its powers may be (and usually are) delegated to the CEO.

3.

Responsibilities and personal liability of managing directors

The general competence of both CEO and the board is described in section VI. 2 above. 110 This section deals with certain specific duties of the management and their responsibility. The management bodies of the company must follow fiduciary duties. These include 111 such obligations as to act in good faith, reasonably, be loyal to the company, act on the benefit of the company and its shareholders, keep confidentiality, also, avoid conflict of interests and certain others. Although the court practice in interpreting such duties is not rich, however certain clarification from existing cases and doctrine may be drawn up. When considering if the behaviour of CEO or member of the board was in accordance 112 with the good faith and reasonable, a standard of a prudent person acting in the same circumstances is applied. The court in a number of case law has also established that a member of managing body due to the office held in the company is subject to the higher standards than those applied to ordinary laymen. This means stricter liability than the one applied to average person when considering activities performed by him/her. The duty to act in good faith and reasonably requires that the member of management body would adopt decisions after consulting with certain specialists (lawyers, auditors etc.) and base his /her decision upon such recommendations. Duty of loyalty obligates members of managing bodies to act in accordance with the 113 articles of association of the company, decision of the general meeting of shareholders or supervisory council. They have to seek to implement the objectives of the company. Meanwhile, the duty to act on the benefit of the company and its shareholders means that the member of the managing body may not adopt decisions that exceed normal risk, are explicitly loss-making or they are economically unprofitable (purchasing goods or services on higher than market prices etc.). The duty of confidentiality means not only obligation to keep commercial secrets but 114 also, not revealing such information which would be damaging to the company. AdRolandas Valiu¯nas and Dovile˙ Burgiene˙

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VI. Management board

ditionally, the member of the managing body should try to avoid the situation when his / her personal interests conflict with the interests of company, and if such circumstances occur, he/she should inform the general meeting of shareholders thereof. 115 Furthermore, members of the managing bodies also have certain other duties, such as to inform the bodies of the company about the conclusion of contracts with the company, managing body of which he is a member of. Also, such member is prohibited from using company’s assets or information for his /her own interests, unless the general meeting of shareholders entitles him/her to do so. 116 The Company Law introduces several specific situations which involve liability of the board and CEO. 117 Company shareholders are entitled to bring a lawsuit to prohibit the managing bodies from concluding transactions which violate the aims of the company and exceed their competence. Members of the board must jointly compensate for losses incurred by the company through board decisions adopted in violation of the company’s articles of association and the law (in such case they would usually be considered to have breached the duty of loyalty). 118 Generally, civil liability to compensate damages incurred to the company because of the actions of the member of managing body arises upon failure to perform the abovementioned duties. According to the principles of the civil liability and interpretation of the Supreme Court of the Republic of Lithuania in recent case law, CEO and members of the board may be held fully liable, despite that fact, that employment contract is concluded with the CEO (and laws limit civil liability of other employees). Also the members of managing bodies may be held liable for breaching the requirements of other laws (not only those stipulating their general duties). For instance, in case CEO concludes restrictive agreement in terms of the competition law, and the company was held liable and obligated to pay certain fines or repay damages, the company may exercise recourse right to seek the damages from the CEO. The liability of the members of managing bodies may be limited by contracts concluded with them or articles of association. 119 Notably, members of the managing bodies may also be subject to administrative and criminal liability.

4.

Other representatives of a company

120 As it was mentioned above, generally, the company is represented by CEO and, in case of collective representation, by CEO and one or several members of the board. 121 General representation powers related to the company’s business may also be granted upon issuance of procuration – a registered general power of attorney. Although introduced only a few years ago, procuration is rather widely used and convenient in the dayto-day activities of the company. However, it should also be noted that any restrictions 530

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1. Mandatory/optional supervisory board

Lithuania

122

indicated by procuration (limitation of the powers to a branch office or certain spheres of activity etc.) shall have no effect on the third parties. This means that all transactions concluded by the procurist ultra vires are binding on the company (i. e. principal) so the situation is rather similar to the one when CEO acting on behalf of the company. Notably, the Civil Code itself restricts procuration in certain spheres (and any such transactions concluded will not be binding on the company). The Civil Code stipulates that procurist has no right to transfer immovable assets of the principal or encumber the rights to it, to sign the balance sheet and tax return of the principal, to institute bankruptcy proceedings of the principal or to issue a procuration to another person. A procurator does not have the right to delegate his authority to any other person.

VII. Supervisory board 1.

Mandatory/optional supervisory board

The Supervisory board (in Lithuania it is referred to as supervisory council) is a special 122 supervisory body formed only in some major public companies. Forming the supervisory council is to full extent optional, both for the private and public companies. If it is not formed, its statutory powers are not assigned to any other corporate body.

2.

Composition and responsibilities

In case the supervisory council is formed in a company, the articles of association should 123 indicate the number of members of the supervisory council (minimum number is 3, maximum number is 15) and also the term of election of the supervisory council (maximum term is 4 years). The supervisory council is formed by the general meeting of shareholders elected by cumulative voting rule. The number of votes conferred on each shareholder is equal to the number of votes granted by the shares multiplied by the number of candidates. A shareholder has full discretion to distribute his votes amongst one or more candidates. The candidates for whom most of the votes have been cast are elected. Supervisory council carries out the following: – appoints and dismisses members of the board (if the board is not formed, then CEO) and supervises activities of the board and CEO; – submits its comments and proposals on the strategy of the company, the annual financial statements, proposals for the distribution of profit, report of the board or CEO on the activities of the company, as well as activities of the board and of CEO to the general meeting of shareholders; and – submits proposals to the board and CEO to revoke their decisions which are incompatible with laws, the articles of association or resolutions of general meeting of shareholders.

124

The supervisory council cannot delegate its powers to the board or CEO.

125

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Lithuania

3.

Qualifications

VIII. Selected capitalization and liability questions

126 CEO and a member of the board of the company, its subsidiary and parent may not be a member of the supervisory council, along with persons who are prohibited to hold such office by the law. 127 Also, it should be mentioned that all candidates to the supervisory council must notify the general meeting of shareholders about conflicting personal interests. Certain additional regulations apply in specific spheres. For instance, there are additional requirements for qualification, experience and reputation for the supervisory councils of the banks.

4.

Consultative/advisory council

128 The Lithuanian laws do not know the concept of consultative or advisory council.

VIII. Selected capitalization and liability questions 1.

Prohibition of repayment of shareholder contributions

129 The laws stipulate for certain situations when contributions of shareholders may be repaid. For instance, in the event of incorporation when the incorporators paid the initial contributions, however failed to register the incorporation documents within 6 months with the Register of Legal Persons, their contributions should be repaid. Also, similar situation arises when the authorised capital is increased by the contributions of the shareholders and the company fails to register accordingly (i. e. indicating the new authorised capital) amended articles of association within 6 months from the adoption of the decision in the Register of Legal Persons. 130 However, in other cases the repayment of contributions may occur to be more complicated. Generally, the shareholders exercise the right to receive a portion of assets of the company under liquidation, however upon liquidation or bankruptcy procedures the shareholders will be the last ones to receive their part. Upon liquidation the assets of the company are distributed among the shareholders in proportion of the par value of the shares they hold only after the company has settled with all the creditors, employees and all taxes have been paid to state budget and monetary funds. The assets of the company may not be distributed to the shareholders earlier than 2 months after all persons had been duly informed on the liquidation. In case of the dispute on the payments of company’s debts, the assets may only be distributed after the settlement of the dispute (i. e. the dispute is resolved in court or the company reaches agreement with the creditors and settlements with them are made).

532

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

2. Capital substituting loans

2.

Lithuania

131

Capital substituting loans

As it was mentioned above, a public company must have a minimum authorised capital 131 of LTL 150,000 (EUR 43,443) while the share capital of a private company must be at least LTL 10,000 (EUR 2,896). The capital may be financed by loans, however certain capitalisation requirements apply. The equity capital of the company may not be less than 1/2 of the authorised capital indicated in the articles of association. In case the equity capital becomes less than indicated proportion, the board or CEO, if the board is not formed, within 3 months must convene the general meeting of shareholders, to adopt one of the following decisions (1) to decrease the authorised capital or (and) (2) to cover the losses by additional contributions of the shareholders, (3) transform the company into the legal entity of another form, or (4) liquidate the company. Unless the general meeting of shareholders does not correct the situation within 6 months when the board (or CEO accordingly) become aware of the situation, the board (or CEO accordingly) has to apply to the court in order to decrease the authorised capital. However, it should be noted that in all cases the decreased authorised capital may not be less than the above indicated minimum.

3.

Obligation to petition for insolvency proceedings

The Lithuanian laws stipulate for 2 insolvency procedures: bankruptcy and restructur- 132 ing. The Lithuanian bankruptcy laws separate 2 different procedures of bankruptcy: judicial 133 bankruptcy proceedings and extra-judicial bankruptcy procedure. Grounds for initiating the proceeding differ. The following parties have the right to file a petition for the initiation of judicial bankruptcy proceedings against a debtor company: – its creditors; – CEO; its owner or owners (i. e. for a company, shareholders holding more than 10% of shares); and – the company’s liquidator (where a solvent liquidation has been commenced but the company has subsequently become insolvent). The persons specified above may file a petition for bankruptcy with the court if at least 134 one of the following conditions is present: – the company fails to pay wages and other employment-related amounts when due; – the company fails to pay, when due, for the goods received, work performed or services provided, defaults in the repayment of claims and does not fulfil other obligations assumed under contracts; – the company fails to pay, when due, taxes, other compulsory contributions prescribed by law and/or the awarded sums; – the company has made a public announcement or notified the creditor or creditors in any other manner of its inability or lack of intent to discharge its obligations;

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

533

135

Lithuania

VIII. Selected capitalization and liability questions

– the company has no assets or income from which debts could be recovered and for this reason the bailiff has returned the writs of execution to the creditor. 135 The fact that a company is balance sheet insolvent (i. e. its total liabilities exceed its assets) is not a sufficient ground for the commencement of bankruptcy proceedings. 136 If any of conditions a), b) or c) specified above are fulfilled, a creditor may file a petition for bankruptcy after the expiry of 3 months from either the due date for satisfaction of the relevant overdue liability or after presentation of a demand for payment (unless a different time period has been contractually agreed). The creditor must give the company a written notice containing a warning that in case of failure to discharge the above obligations within the time limit specified in the notification (not less than 30 days) the creditor will file a petition for the bankruptcy. 137 If the company is and (or) will be unable to settle with the creditor(s), and the latter have not filed a petition for bankruptcy to court or if the company has made a public announcement or notified the creditor or creditors in any other manner of its inability or lack of intent to discharge its obligations, CEO or the owner or owners, must file for the initiation of the company bankruptcy proceedings. 138 Petitions must be filed with the district court of the locality in which the central administration of the company is situated. That court, not later than 1 month from the date of filing of the bankruptcy petition, will give a judgment regarding whether bankruptcy proceedings should be commenced. The bankruptcy proceedings will be commenced if the court has established that (1) the company is insolvent or delays payment of salaries to employees for more than three months; or (2) the enterprise has made a public announcement or notified the creditor or creditors in any other manner of its inability or lack of intent to discharge its obligations. 139 Meanwhile the extra-judicial bankruptcy procedure may only be initiated by CEO or owners of an insolvent company although ultimately its implementation will require the consent of the company’s creditors who consequently have an effective right of veto. The head of the company and owners will notify each creditor in writing of the company’s insolvency and of the proposal to implement the extra-judicial bankruptcy procedure, indicating the time and place of a creditors’ meeting to consider the same. This meeting must be convened within 20 days of the day of dispatch of the notification. 140 The proposal for an extra-judicial bankruptcy procedure will be implemented if approved by the creditors whose claims in value account for at least 80 % of the company’s current financial liabilities, including any contingent liabilities, as at the day of the meeting. The meeting also decides upon the duration of the extra-judicial bankruptcy procedure, the date for settlement of claims and the appointment of an administrator. If the creditors fail to agree on the adoption of the extra-judicial bankruptcy procedure a petition for bankruptcy proceedings at court against the company may be filed on the ordinary grounds.

534

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

1. Bookkeeping and annual financial statements (publication obligations)

Lithuania

141

Meanwhile restructuring is a procedure for companies which face temporary solvency 141 problems. Its purpose is to avoid bankruptcy by allowing companies that face short-term financial difficulties but that have not ceased commercial activity to preserve and maintain their business, to settle their debts and to be restored to solvency. It is not available for banks, credit unions, other credit institutions, insurance companies, investment companies, pension and other funds or securities brokers. A restructuring may be initiated by the company’s management, owners, or its creditors. 142 However, in every case the restructuring plan must be supported by 75% of the company’s creditors (by value of claim) with approved claims. Accordingly, the restructuring may prove to be either voluntary or involuntary depending upon whether management and shareholders lend its support. The restructuring plan must also be approved by the court although this is generally a formality with the judiciary rarely looking into the substance of the proposals. The restructuring of a company may only be attempted prior to the institution of 143 bankruptcy proceedings. Once bankruptcy proceedings have been commenced, the company may only be liquidated or restored to solvency through a composition with its creditors. However, until such time as bankruptcy proceedings are commenced, any petition for a restructuring of the company will be afforded priority. In other words, if a petition for the restructuring of a company is made at the same time as or after the petition for bankruptcy proceedings, the court will only decide upon whether bankruptcy proceedings should be commenced if the restructuring petition is dismissed.

IX. Accounting 1.

Bookkeeping and annual financial statements (publication obligations)

Financial accounting is a system operating within the company in order to obtain 144 information necessary for making business decisions and financial reporting. Special laws provide for some peculiarities in the accounting of credit and other financial institutions. Financial accounting of the company must comply with Business Accounting Standards prepared by the Lithuanian Accounting Institute. Companies whose securities are listed on the Vilnius Stock Exchange follow International Accounting Standards as of 1 January 2005. Accounting is based on a double-entry system. All business events must be supported by 145 accounting documents and included in a relevant accounting register no later than the thirtieth day of the following month. Documents are made and registers kept in Lithuanian and, if necessary, in Lithuanian and any other language. Accounting documents must contain enumerated mandatory data on the accounted event and a signature of the authorised person. Signature may be made in electronic form according to the Law on Electronic Signatures.

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

535

146

Lithuania

IX. Accounting

146 Accounting may be kept either by a special department within the company (or a chief financier) or such services outsourced from an enterprise engaged in bookkeeping services. The basic principles of financial accounting are enumerated in the Law on Financial Reporting of Enterprises: – the principle of the company – each company is deemed to be a separate unit of accounting; – the principle of the continuity of activities – a presumption is made that the term of company activities is indefinite and it is not going to be wound up, except if a definite term of activities is set or a decision on winding up is made; – the principle of periodicity – activities of the company for the purpose of accounting are divided into financial years or other accounting periods. The financial year lasts 12 months. Due to changes in the company’s activities, it may be changed, but not more than once every five years. The financial year of a newly established company, a company under reorganisation or winding up, or of a company changing its financial year, may be shorter or longer than 12 months, but must not exceed 18 months; – the principle of constancy – a chosen method of accounting must be applied every financial year. It may be changed only in pursuit of correct reflection of assets, equity capital and liabilities of the company; – the principle of monetary evaluation – all assets, equity capital and liabilities of the company must be expressed in cash; – the principle of accrual – income is determined at the moment when it becomes due, and costs at the moment when they arise irrespective of actual cash flows; – the principle of comparison – income received within one accounting period are related to the costs of that period. – the principle of caution – a company must choose such accounting methods that the value of its assets, equity capital and liabilities would not be unreasonably under- or overstated; – the principle of neutrality – the accounting data should not have as its purpose making a specific influence upon the decisions of its users; and – a principle of content weight – business operations and events should be included in the accounting on the basis of their content and economic meaning and not just legal form. 147 When the principles and business accounting standards are not sufficient for the financial accounting to reflect assets, equity capital and liabilities of the company, additional information must be provided. 148 Newly registered companies must draw up an initial balance sheet to reflect assets, equity capital and liabilities existing at the beginning of the business activities. Annual financial statements must be prepared after the financial year has ended. Interim financial statements are prepared periodically as required by the laws or upon necessity. Prior to the drawing up of financial statements all business operations and events of that financial year must be reflected in the financial accounting of the company. Accounting data must be supported by the results of the inventory.

536

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

2. Audit requirements

Lithuania

149

Financial reporting of the company consists of the following financial statements: – balance sheet; – income statement; – cash flow statement; – statement of changes in equity capital; and – notes to the financial statements.

149

The records must disclose the company’s financial position at a given time, record its 150 assets and liabilities, contain day-to-day entries of payments and receipts and serve as the basis for the preparation of the annual financial statements. Companies may prepare their financial statements in a simplified form if for the last two 151 consecutive years they satisfy at least two of the following criteria: – the gross annual income of sales does not exceed LTL 10 million (EUR 2.9 million); – the value of its assets included in the balance sheet does not exceed LTL 5 million (EUR 1.4 million); or – the average annual number of listed employees does not exceed 250. Companies may prepare simple form financial statements and omit the cash flow 152 statement if for the last two consecutive years they satisfy at least two of the following criteria: – the gross annual income of sales does not exceed LTL 1 million (EUR 290,000); – the value of its assets included in the balance sheet does not exceed LTL 500,000 (EUR 145,000); or – the average annual number of listed employees does not exceed 50. Financial statements of the company must be signed by its CEO. Annual financial 153 statements must be approved by the annual general meeting of shareholders within 4 months after the end of the financial year. Within 30 days from the date of their approval, annual financial statements have to be submitted to the Register of Legal Persons.

2.

Audit requirements

Lithuanian laws describe audit as an independent review of financial statements and 154 provision of the report of the review indicating whether financial statements of the company in all material respects represent a fair view of the company’s financial state, results of its activities and cash flows, as well as whether they comply with applicable legislation and accounting standards. It may be carried out only by a certified auditor. An audit is mandatory for the annual financial statements of public companies and 155 those private companies that satisfy at least two of the following conditions: – the sales income for the financial year being accounted for exceeds LTL 10 million (EUR 2.9 million);

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

537

156

Lithuania

X. Taxation only general aspects of the tax treatment

– the average number of the listed employees for the financial year being accounted for exceeds 50; or – the value of the assets indicated in the balance sheet exceeds LTL 5 million (EUR 1.4 million). 156 Also, the articles of association of a company may stipulate for mandatory audit.

3.

Disclosure

157 The annual financial statements together with the report on the activities of the company and the auditor’s conclusion (if audit is mandatory under the laws or the articles of association) must be submitted to the Registrar of the Register of Legal Persons within 30 days after the annual general meeting of shareholders. The documents are publicly available.

X. Taxation (only general aspects of the

tax treatment, in particular applicable taxes) 1.

Direct taxes

a)

Corporate Profit Tax

158 According to the Law on Profit Tax, profit and (or) income of a Lithuanian taxable entity (a legal person registered under Lithuanian legal acts) and a foreign taxable entity (a foreign legal entity or organisation established in a foreign state, and which is incorporated or organised in any other way according to the legal acts of a foreign state) is subject to corporate profit tax. 159 The tax base of corporate profit tax for a Lithuanian taxable entity is all income received in Lithuania and abroad, the source of which is either in Lithuania or abroad, as well as so-called positive income received by a controlled foreign entity. The tax base of corporate profit tax for a foreign taxable entity is: – income received from the activities carried out through a permanent establishment in Lithuania; and – income received not through the permanent establishment, the source of which is in Lithuania, such as interest income (except for interest income from deposits and certain subordinated loans, as well as interest on government securities issued in international financial markets), income from a distributed profit (e. g. dividend), royalties and other similar income, as well as income received from the sale or lease of an immovable asset, which is located in Lithuania. 160 Noteworthy, royalties received in Lithuania by a foreign entity, that has no permanent establishment, on the transfer of computer programme, are taxable only in cases when such transfer is effected by transferring a tangible asset with the programme embedded 538

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

1. Direct taxes

Lithuania

161

therein and when the commercial use of such programme is licensed (making copies for public distribution, developing derivative programmes and public demonstration of the programme). Taxable profit is determined by deducting from the income: – non-taxable income, a complete list of which is provided in the law, such as insurance disbursements, reappraisal income, default interest and penalties (except if received from tax havens); – permitted limited deductions, a complete list of which is provided in the law, such as depreciation, repair costs of long-term assets, natural wear and tear, representation expenses; and – other permitted deductions defined as all costs actually incurred, which are usual for the activities of the company and necessary for earning the income or gaining other economic benefit.

161

Certain expenses, including e. g. default interest, long term or securities reappraisal 162 expenses or other expenses that are not related to earning of income or to the usual activities of the company, are not deductible. Payments directed to the tax havens are deductible only if such payments are made for tangible assets import of which is documented or if the company supplies proper evidence to the tax authorities showing that the payments are related to the usual activities of the payer and payee, the recipient posses assets necessary for such usual activities and there is a link between the payment and commercially reasonable business transaction. Depreciation may be calculated by applying either a linear or double-balance method. 163 A company, through relevant decisions of the board, sets the depreciation norms (in years) and liquidation value of the groups of long-term assets subject to the following limitations: – depreciation norms must not exceed the maximum depreciation norms provided for different types of assets in the law. For example, new buildings (built after 1 January 2002) must be depreciated within 8 years, other nonresidential buildings – 15 years and vehicles – 4 to 10 years. Small enterprises with a maximum registered number of 10 employees and a maximum gross income of LTL 500,000 are not bound by the maximum depreciation norms, except in the case of new buildings; and – the liquidation value may not fall below LTL 1 and may not exceed 10 % of the purchase value. A 15% tax rate is applied to taxable profit of Lithuanian entities and permanent 164 establishments of foreign entities. A 13% tax rate is applied to the taxable profit of entities where the average recorded number of employees does not exceed 10 and income received during the taxable period does not exceed LTL 500,000, except in certain cases. A 10 % withholding tax rate is applied to the income (without any deductions) of 165 foreign entities received:

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

539

166

Lithuania

– as interest and royalties the source of which is in Lithuania that is not received through a permanent establishment in Lithuania. Income received as interest on deposits and subordinated loans that meets the criteria established by the Bank of Lithuania is not subject to taxation; and – for property immovable by nature which is sold, transferred in any other way or leased, and is located in the territory of Lithuania. A foreign entity, having received income for the immovable property sold or transferred in any other way, has a right to apply to the local tax inspectorate for a re-calculation of the corporate profit tax that has already been calculated and paid. In such case, profit tax is calculated on the capital gains. 166 Dividends received and paid by Lithuanian entities, as well as other income received as a result of profit distribution is subject to taxation at a 15% tax rate. Dividends received by the Lithuanian entity from Lithuanian or foreign entities wherein the Lithuanian entity that receives dividends continuously owns more than 10% of the voting shares is not subject to the profit tax, except if the dividend is received from a state considered to be a tax haven. Dividends paid by the Lithuanian entity to a foreign entity wherein the foreign entity that receives dividends continuously owns more than 10 % of the voting shares, are not subject to taxation, except if the dividend is paid to a state considered to be a tax haven. If the Lithuanian entity that pays or receives dividends is not subject to taxation at the 15% or 13% tax rate the aforementioned two exemptions are not applicable. 167 If losses are incurred during the taxable period, such losses may be carried forward to the following taxable period except for the losses that have been incurred as a result of trading in securities and (or) derivatives. Losses incurred as a result of trading in securities and (or) derivatives may be carried forward to the following taxable period, however such losses may be deducted only from the income received during the following taxable period as a result of trading in securities and (or) derivatives. 168 Losses from the usual activities of taxable period may be carried forward for no longer than five consecutive taxable periods. Losses incurred as a result of trading in securities and/or derivatives may be carried forward for no longer than three consecutive taxable periods. b)

Personal Income Tax

169 All permanent residents are subject to the income tax on different types of income earned in Lithuania and abroad. Individuals are considered to be permanent residents if: – they have their permanent place of residence in Lithuania; – a centre of their personal, social and economic interests lies rather in Lithuania than abroad; – they stay in Lithuania for more than 183 days during the tax year; – they stay in Lithuania for more than 280 days in several consecutive tax years, provided that they stay in Lithuania more than 90 days during any one of such consecutive tax years.

540

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

1. Direct taxes

Lithuania

170

Non-residents are subject to the income tax on: – all kinds of income received through permanent base, which is defined as a form of individual activities, except sportsman and performer’s activities, when a person either is engaged in permanent activities in Lithuania or is engaged in such activities through a dependent representative or uses there a construction site or a natural resources extraction equipment; – certain kinds of income received not through permanent base in Lithuania, such as interest; income from the distributed corporate profit; rent payments for the real estate situated in Lithuania; honoraria; employment related income; income from the sports activities or activities of performers; and income derived from the real estate situated in Lithuania or movables registered in Lithuania.

170

Personal income tax is not levied on certain allowances; pensions paid from the state 171 social security fund, state and municipal budgets, private pension funds; certain kinds of interest; certain life insurance payments; charity; certain inheritance and donations; certain transfers of ownership below minimum values; and on various scholarships paid by the state, educational institutions or listed non-governmental organisations. One of the major novelties of the new Law on Resident’s Income Tax was reducing the 172 number of the tax rates and now only two tax rates – 15% and 33% – apply. Notably, tax rate applicable with respect to the employment related income has not changed and remains at 33%. A 33% tax rate applies, unless directly specified otherwise in the law. In general, 15% 173 rate applies to (the list is not exhaustive): – income from distributed profit of Lithuanian and off-shore companies; – income of sailors working on vessels flying under foreign (and non-EU) flag; – income of sportsmen, performers and other honoraria; – income from lease of property or sale of the assets that are not used in business activities; – certain payments from private pension funds or certain life insurance payments below the contributions paid to such funds or under such life insurance agreements. Depending on who must withhold and pay the tax, all income divided into two classes. 174 Class A income is withheld and paid by the payer and class B income – by the recipient himself. All income directly not attributed to class A is a class B income. The following types of income are attributed to class A: – income received from Lithuanian companies or permanent establishments of foreign companies in Lithuania and from permanent bases in Lithuania of non-residents except for income derived from sale of assets which are not registered in Lithuania and for income from individual business activities other than sports and activities of performers; and – employment related income, as well as income derived from sports activities and performer’s activities, interest and honoraria received from Lithuanian residents. Rolandas Valiu¯nas and Dovile˙ Burgiene˙

541

175

Lithuania

175 Income tax on class A income is withheld and paid when the payment itself is made to the taxpayer. Income tax on class B income is paid by the resident himself when on the expiry of the tax year he files his income tax returns.

2.

Indirect taxes

a)

Value Added Tax

176 Every supply of goods or services performed by the taxable person during the course of its business within the territory of Lithuania for a consideration is taxable in Lithuania. The following paragraphs describe in more detail separate aspects of this definition. The import of goods giving rise to the import debt is also subject to VAT. 177 “Business activities” for the purpose of VAT are considered to be all kinds of activities, including manufacture, commerce, agriculture, professional activities, possession of property and/or proprietary rights, carried out in order to receive any kind of income, whether or not profit is sought. However, certain types of activities, such as engagement as an employee, state and municipal activities, holding a bank account, shares or other securities, excluding sales or other transfer of such securities, as well as incidental transactions are excluded from the scope of the definition. 178 The notion of “a good” covers all tangible objects (res) including numismatic money, as well as electricity, gas, heat and other kinds of energy. The supply of goods is not limited to traditional cases when ownership title or similar disposal rights are transferred, whether immediately or when the entire price is paid. It may also take the following forms: – establishment or assignment of rights in rem (servitude, long-term lease, surety, usufructus) with respect to immovable property; – consumption of goods for private needs; – creation of long-term tangible assets; – transfer of property due to winding up of a legal person in the course of its reorganisation, if purchase or import VAT on such asset has already been deducted by the wound up taxpayer; – return of a substantially improved building (construction), used on grounds other than its ownership, to its owner prior to the expiry of the term for deduction corrections, if purchase or import VAT on such object has already been deducted by the taxpayer having made the property improvements; and – transfer of any property as a contribution of a participant of legal person if purchase or import VAT on such object has already been deducted by the transferor. 179 Any transaction regarding any civil rights’ object not qualified as a supply of goods is considered to be a supply of “services”. 180 Goods are considered to be supplied “in Lithuania” if their carriage began in Lithuania or, if they are not transported, if they were in Lithuania at the moment of supply. As a 542

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

2. Indirect taxes

Lithuania

181

general rule, services are considered to be supplied in the place of the supplier’s registered seat or domicile or in the place of foreign subdivision through which the service has been supplied. However, different rules apply in a number of cases: – services related to real estate are taxed in Lithuania if such real estate is situated therein; – some services, such as cultural, artistic, educational, scientific, entertainment, transportation services, appraisal and maintenance of movable property, are taxed in Lithuania if they are actually rendered therein; – some services, such as transfer or licensing of intellectual property, consulting, audit, accounting, legal, financial services, insurance, advertising and telecommunications, are taxed at the place of the buyer’s registered seat or domicile; and – movable property use services are taxed in Lithuania if the leased object is actually used therein, actual use within the country being presumed. Certain goods and services are exempted from VAT, including, for example: – healthcare services rendered by authorised providers and related goods; – social services rendered by certain non-profit organisations and related goods; – educational and training services rendered by authorised providers; – certain cultural, sport and other services rendered by non-profit organisations; – post, television and radio services; – insurance and financial services (granting of loans, issuance of guarantees, securities, currency and derivatives transactions etc.); – lottery and gambling services; and – lease, sale or other transfer of real estate.

181

The taxable value of goods and services supplied is defined as the remuneration received 182 by the supplier or service provider, including all taxes related to the transaction (VAT excluded), related expenses, such as packaging (subject to the absence of agreement regarding return of tare), transportation and the like, as well as any subsidies and subventions influencing a final price. If such remuneration is paid in the form of other goods or services (i. e. barter), taxable value is the amount of remuneration as if received in cash. The law has established 3 types of VAT tariffs: (a) ”standard” tax rate at 18%; (b) 2 preferential rates of 5% and 9% established for certain goods; and (c) so-called “zero” rate tax, which applies inter alia to the export of goods. b)

183

Excise Tax

As of 15 August 2003 an excise tax at the following rates (the list provided below is not 184 exhaustive) is levied on the following products: – ethyl alcohol and alcoholic beverages: (i) beer – LTL 7 per hectolitre for every 1% of actual alcohol concentration expressed in volumetric percents, (ii) fresh-grape wine – LTL 150 per hectolitre, Rolandas Valiu¯nas and Dovile˙ Burgiene˙

543

185

Lithuania

XI. Dissolution of a company/termination of the business

(iii) ethyl alcohol – LTL 3,200 per hectolitre of pure ethyl alcohol, – processed tobacco: (i) cigarettes are subject to a combined tax rate – the specific component is LTL 47.5 per 1,000 cigarettes and the value component is 15% off the maximum retail price, (ii) cigars and cigarillos – LTL 30 per kilogram, – fuels: (i) engine petrol – LTL 1,318 per tonne, (ii) liquid fuels (boiler oils) – LTL 45 per tonne. 185 Excise taxpayers are legal or natural persons who manufacture or import goods subject to excise tax. Companies operating in free economic zones are exempt from excise tax payments. 186 Some goods, formerly subject to VAT, have been made an object of a merchandise turnover tax. Thus, for example, cars, the value of which exceeds LTL 100,000 (about EUR 29,000) are taxed at 15% of their value exceeding LTL 100,000, erotic and violent publications at 75% of their value and some cheap perfumery containing alcohol is subject to a LTL 10 per liter turnover tax.

XI. Dissolution of a company/termination of the business 1.

Grounds for liquidation

187 The grounds for winding up of a company may be divided into several blocs: – expiry of the term for which a company of limited duration has been established; – voluntary winding up of the company by a decision of a general meeting of shareholders; – involuntary winding up: (i) by a decision of the court that the company has been unlawfully established, (ii) by a decision of the court or creditors’ meeting to wind up a bankrupt company, (iii) by a decision of the court if an expert appointed upon the application of shareholders representing at least 10 % of the authorised share capital, produces a report stating that the conduct of the company or its bodies’ activities have been improper and the court agrees with it; or (iv) by a decision of the court to wind up the company for infringements of the laws.

2.

Expiry of the term of a company’s activities

188 If the articles of association contain a certain period for the company’s duration (which occur rather rarely), no later than three months prior to the expiry of that period a general meeting of shareholders must be convened. It may decide either to prolong the 544

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

3. Voluntary winding up

Lithuania

189

term by changing the articles of association or to liquidate the company and appoint a liquidator. If upon the expiry of the term a liquidator is not appointed by a decision of a general 189 meeting of shareholders then, upon application of the shareholders who have more than 10 % of the votes or the Registrar of the Register of Legal Persons, a liquidator is appointed by the court.

3.

Voluntary winding up

At any time in the company’s existence its shareholders may, by a qualified two thirds 190 majority of votes, pass a resolution of a general meeting of shareholders to wind up the company. However, this may not be done if the company is insolvent. If the equity capital of the company is not restored to above 50 % of the authorised 191 share capital, the general meeting of shareholders must decide to reduce the authorised share capital, change the legal form of the company or wind up the company.

4.

Involuntary winding up

An involuntary winding up may proceed if the company is deemed unlawfully estab- 192 lished. A court may find a company to be unlawfully established if: – all of its incorporators did not have full capacity at the moment of incorporation; – the mandatory norms regulating the incorporation process were not correctly followed; – the company’s objectives as indicated in the articles of association are unlawful or against public order; – the minimum share capital required by law was not contributed according to the terms and conditions provided for by law; or – the name and amount of the authorised share capital is not indicated in the incorporation agreement or articles of association or the articles do not specify the company’s objectives. Finding of the court that the company had been unlawfully established has no impact 193 whatsoever upon the validity of contracts executed by the company. Moreover, it does not automatically cause a winding up. The court may set a term for the remedy of any infringements discovered. If the company does not comply with such a court order, it is wound up by the court. Different regulations apply for winding up of a bankrupt company. The initiation of the 194 bankruptcy proceedings is discussed in section VIII. 3 above.

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

545

195

Lithuania

5.

Bankruptcy

XI. Dissolution of a company/termination of the business

195 The most significant consequences that occur after the court institutes bankruptcy proceedings are the following (the list provided is not exhaustive): – the governing bodies of the company lose their powers, which in turn are vested in the appointed bankruptcy administrator, and the administrator must terminate employment contracts with members of the board and the CEO within 15 days by written notice; – the company is prohibited from discharging any financial liabilities not met prior to the institution of bankruptcy proceedings, including payment of interest, default interest, penalties and taxes. An automatic stay is put on actions for recovery of debts of the company, which have been filed through the court proceedings or without them. Calculation of interest and penalties (default interest) on all liabilities is suspended; – the company has the right to engage in business activities only provided that such activities reduce the losses of the creditors incurred due to the bankruptcy. Income received from business activities should be used to cover the expenses related to such activities; – on the request of the creditors, the court may impose restrictions on the business activities of the company and disposal of its assets, which may not be sold, rented out, pledged /mortgaged or otherwise disposed of without consent of the court; and – if, within 30 days from the entry into force of a court order to institute the bankruptcy proceedings, the administrator has notified the persons concerned that the company will not perform agreements, the term for the performance of which has not yet expired, the terms of such agreements (except for employment contracts and agreements, which give rise to the claims of the company under bankruptcy to third parties) are deemed expired. Claims, which arise due to such expiry, are satisfied in the order of preference applicable to the claims of all bankruptcy creditors. 196 After the court examines the bankruptcy case and recognises the business as bankrupt, it shall adopt the order to liquidate the business due to bankruptcy if, within three months from the entry into force of the order to approve the claims of the creditors: – the court has not prolonged this term (this term of three months may be prolonged only on the request of the creditors’ meeting); and – an order to approve a settlement agreement has not been adopted. 197 Assets of the bankrupt company shall be sold and the proceeds of sale applied towards the satisfaction of the creditor claims. Specific rules for the satisfaction of such claims with regards to a bankrupt company as compared to the general rules of satisfaction are established by law: – the claims secured by pledge or mortgage have absolute priority in respect of proceeds from the sale of pledged/mortgaged assets. Only if such assets are sold for a higher price than is necessary for satisfaction of all secured creditors’ claims, is the remainder of proceeds distributed among other (unsecured) creditors; – satisfaction of creditor claims is performed in two stages. Firstly, only claims for principal amounts of debts, excluding accumulated interest and default interest or 546

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

6. Unsatisfactory results of the expert’s review of activities

Lithuania

198

penalties, are satisfied in accordance with the order of preference described below. Secondly, the remaining claims (for interest and default interest or penalties) are satisfied in accordance with the said order of preference; – a special order of preference among the creditors is established, where: (i) the employment-related claims and claims for unpaid agricultural production supplied for processing are satisfied in the first round (please note that the Government has established funds, which may be applied to for satisfaction of claims arising from employment relations and for supplied agricultural production), (ii) next the tax related claims and unpaid social insurance contributions as well as claims regarding foreign loans received in the name of, or guaranteed by, the Republic of Lithuania are satisfied, and (iii) next the claims of all other creditors, – only when the claims of all creditors of a higher rank in the order of preference are satisfied, are the claims of the lower rank creditors paid. If the proceeds from the sale of assets are not sufficient to cover all claims of the same rank creditors, such claims are satisfied proportionately to the value of claim held.

6.

Unsatisfactory results of the expert’s review of activities

Shareholders of the company representing at least 10% of the authorised share capital 198 may apply to the court for the appointment of an expert to review whether the activities of the company, its governing bodies or members have been conducted properly and for the application of one of the following measures if evidence of wrongdoing is established: – annulment of the decisions of the company’s bodies; – suspension of the powers of members of corporate bodies or removal of such persons; – appointment of temporary members of corporate bodies; – permission to abstain from the performance of some provisions of the founding documents (incorporation agreement and articles of association); – court order for the company to perform, or abstain from performing, certain actions; or – winding up a company and the appointment of its liquidator. If an appointed expert finds evidence of wrongdoing in the conduct of the activities of 199 the company, its governing bodies or its members and indicates it in the report, and the court agrees with such a finding, it may apply one of the above mentioned measures. However, the decision to wind up a company and appoint its liquidator may not be made if it would be against the interests of other shareholders or employees of the company or against the public interest.

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200

7.

Lithuania

XI. Dissolution of a company/termination of the business

Company “in liquidation”

200 General meeting of shareholders, or the court after having taken a decision to wind up the company, or the Registrar of the Register of Legal Persons having obtained the court’s decision to wind up the company, shall appoint (and remove from office or replace) the company’s liquidator (administrator of the company in liquidation). The corporate bodies of the company, except for the general meeting of shareholders, are divested of their authority to manage the company, as of the day of the liquidator’s appointment. 201 The liquidator shall notify the Register of Legal Persons of the alteration of the company’s status and furnish it with information concerning the liquidator. For this notification, an application signed by the liquidator, a document confirming the winding-up decision and a document presenting data regarding the liquidator must be presented to the Register of Legal Persons. After the company acquires the status of a company in liquidation, the words “in liquidation” must precede its name in the registration certificate and anywhere else where its name is used. 202 A company in liquidation may conclude only those transactions, which are related to its winding up, as well as those transactions, which are indicated in the decision on winding up. 203 The liquidator shall represent the company in liquidation in court, and in its relations with state institutions, and other natural and legal persons. The liquidator of the company has the following powers and responsibilities: – to draw up the company’s financial statements as of the beginning of the winding up; – after completion of settlement with the creditors, to distribute the remaining assets of the company among the shareholders on drawing up the transfer acts; – to apply to the Securities Commission for the cancellation of the registration of the shares of a public company; – to draw up the company’s deed of liquidation; – to transfer the documents of the company in liquidation for safekeeping in accordance with the Law on Archives; and – to present to the Register of Legal Persons the documents required in order to have the company removed from the public register. 204 If the winding up of the company lasts for several years, within three months of the end of each financial year the liquidator must draw up the annual financial statements and a liquidation report. These documents are open for review by all shareholders and interested parties. 205 Shareholders who hold shares, the total par value of which amounts to at least 10 % of the authorised capital, have a right to apply to the court for the replacement of a liquidator (majority shareholders are free to replace a liquidator at any time by a decision of a general meeting of shareholders).

548

Rolandas Valiu¯nas and Dovile˙ Burgiene˙

8. Distribution of assets

8.

Lithuania

206

Distribution of assets

In order to protect the interests of the creditors and shareholders of the company, the 206 liquidation of the company must be published three times in the regular press as provided in the articles of association with intervals of at least 30 days or published once and notified to every creditor in writing. The distribution of the company’s assets to the shareholders may be carried out only on the expiry of two months after such obligations of notice have been met. After the liabilities to the creditors have been discharged and the owners of preference 207 shares with cumulative dividends have been paid, the remaining assets may be distributed to the shareholders in proportion to the par value of the shares owned by them. Any contingent assets are later distributed in an analogous manner. After the decision to liquidate the company is adopted and after the company liquidator 208 effects settlement with at least one of the shareholders a general meeting of shareholders of the company in liquidation is divested of its authority to change the status of the company in liquidation.

9.

Completion of winding up

Upon completion of all the procedures, a liquidator is entitled to apply to the Register 209 of Legal Persons with the request to remove the company from the register. After the relevant changes in the register are made, the company is deemed wound up and ceases to exist.

10. Reorganisation The companies may also end by the way of reorganisation, however as a general rule 210 this is used for the change of structure and not for termination of business. Reorganisation may be implemented either by merger or split. Mergers may be implemented either by absorption (one or more companies are merged into another existing company) or consolidation (two or more companies are merged in one new company); while splits may take the form of distribution (assets and liabilities of one company, which is dissolved, are transferred to other existing companies) or separation (two or more new companies are formed on the basis of a company which is dissolved).

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Netherlands Duco Ottevangers

Table of Contents I.

Survey

554

II. Public Company Limited by Shares (Naamloze Vennootschap – NV –)

and the Private Company with Limited Liability (Besloten Vennootschap – BV –) 1. Character of the NV/ BV 2. Incorporation a) Incorporation procedure aa) Deed of Incorporation bb) Incorporators cc) The Articles of Incorporation dd) Blocking clauses ee) The capital of the company ff) Date the company comes to existence gg) Opening of bank accounts b) Registration procedure/ Commercial Register c) Approval requirements for special companies aa) Bank bb) Insurance Company cc) Other companies requiring a license or special supervision d) Shelf Companies e) Costs/Duration f) Pre-incorporation status 3. The Shareholder a) Rights and duties of a shareholder aa) Dividend bb) General meeting/voting rights cc) Information dd) Contribution ee) Minority rights

Duco Ottevangers

555 555 556 556 556 556 557 558 559 561 561 561 562 562 563 563 563 564 565 565 565 566 566 566 566 566

b) Shareholders meetings aa) Function bb) Calling of a meeting cc) Competence dd) Oligarchic clauses c) Shareholders resolutions aa) Quorum/majorities bb) Limitations of voting rights cc) Resolutions outside a meeting dd) Challenging of resolutions (1) Ad a (2) Ad b (3) Ad c d) Shareholder exclusion 4. The NV Share/ BV Share a) Types of shares aa) Bearer shares bb) Registered shares cc) Preference shares dd) Priority shares ee) Letter shares b) Transfer of shares aa) Legal requirements bb) Company approval cc) Blocking clauses dd) Costs c) Own shares d) Withdrawal of shares 5. Articles of Association a) Mandatory content b) Amendment of the articles of association aa) General procedure bb) Shareholders resolution cc) Notarisation dd) Deposition with the Trade Register

567 567 567 568 568 569 569 570 570 571 571 571 571 571 572 572 572 573 573 574 574 574 574 575 575 576 576 577 578 578 579 579 579 580 580

551

Netherlands c) Capital increase/decrease aa) Capital increase bb) Capital decrease 6. Board of directors a) Directors aa) Function/appointment bb) Minimum number cc) Other representatives b) Management and representation c) Conflict of interest 7. Supervisory Board a) Appointment of members of the supervisory board b) Function/duties c) Composition d) Powers 8. Selected capitalization and liability questions a) Personal liability for shareholders / directors b) Discharge c) Forbidden distributions to shareholders and consequences d) Shareholders’ loans e) Loss notification f) Affiliated enterprises 9. Accounting a) Annual accounts Contents

Index 580 580 581 582 582 582 583 583 584 585 585

b) c) d) 10.

585 586 586 587

III. Limited Partnership – with a BV

587 587 588

588 589 589 590 590 590 590

a) 11. 12. 13.

Audit requirements, adoption Publication Reserves Termination of the business (dissolution/liquidation) Liquidation Insolvency Choice of seat outside the Netherlands Special provisions and simplifications for larger stock corporations (so-called “structuurvennootschap”)

592 593 594 595 596 597 597

598

as general partner – (Commanditaire 600 Vennootschap – CV –) 1. Character of the CV 2. Formation 3. Partners/Partners’ meeting 4. Management 5. Termination of the business/ accession/retirement 6. Accounting

600 601 602 604 605 606

IV. Branches of Foreign Companies/

Other Business Forms 1. 2. 3.

Branches Formation/registration procedure Other business forms

607 607 608 608

Index Articles of association 8-11, 33, 64-69, 71-76, 99-104, 124 Exclusion of shareholders 50 Advisory Committee 82 Formation 113, 114, 125 Approval (by supervisory board) 66, 80 General Partnership 110-112, 116, 126 Approval (annual accounts) 85, 96, 100 Insolvency 100-105 Annual General Meeting 38-42 Limited Partnership 110-123

552

Approval (transfer of shares) 4, 12 Liquidation 30, 31, 67, 100, 103-105, 109, 114 Amendment (articles) 14, 66-71. Management Board 11, 39, 43-45, 51, 66, 68, 73-109, 125 Annual Accounts 4, 39, 85, 90-99, 109, 122, 123-125 Merger 51, 56 Authorised Capital 3, 8, 13, 47, 64 Nominal value/amount 17, 18, 21, 47, 53, 54, 62-64, 70, 71, 84

Duco Ottevangers

List of Reference Books and Publications Bearer Shares 3, 4, 48, 51-52, 56, 64, 67 Notary 7, 14, 19, 29, 66 Balance Sheet 12, 25, 34, 62, 86, 90-93, 97-99, 108, 123 Notarisation 68 Branch 24, 124-125 Officers 109 Business 1, 10, 11, 14, 28, 51, 89, 100-109, 112, 116, 123, 126 Own Shares 39, 61, 62 Capital Increase 70-71 Partnership 108, 110-123 Capital Decrease 70-71 Pre-incorporation status 30 Chamber of Commerce (Kamer van Koophandel) 7, 20, 29, 69, 100, 101, 103, 125 Premium 14, 29, 35, 53, 70, 93, 99 Contribution of capital 13-20, 35, 65, 70, 84 Proxyholders 22, 42, 75, 83 Contribution by partners 117-118 Profit and Loss account 25, 90-93, 98

Netherlands Corporate body 12, 44, 59, 72-74, 95 Registered office 10 Corporate seat 8, 10, 22, 64, 107 Registered share 3, 40, 51-53, 56-59, 62 Dissolution 2, 39, 100, 122 Restricted Transferability of Shares 59 Dividend 32, 36, 51, 53, 55 Share Certificate 3, 5, 51, 56 Employees 79, 87, 90, 108, 109 Shareholders’ Register 5, 40, 57, 58 Shareholder 12 et seq. Shareholders’ Meeting/General Meeting 12, 32-50, 54, 63, 66-68, 70, 72-80, 82, 85, 88, 91, 93-97 Shelf Company 27, 28, 101 Stock Exchange 26, 51 Supervisory Board 22, 30, 33, 34, 43, 45, 46, 66, 72-75, 77-84, 91, 94, 95, 108, 109, 125 Transfer of shares 3, 4, 7, 10, 12, 37, 43, 51, 54, 56-62

List of Reference Books and Publications BV en NV,

Prof. mr. P. Sanders, mr. W. Westbroek, adapted by mr F.K. Buijn en Prof. mr P.M. Storm, Kluwer, Deventer, 1998 (8th print)

Van de BV en de NV

Mr P. van Schilfgaarde Gouda Quint, Deventer, 2003 (13th print)

Juridisch Lexicon (the legal lexicon)

A. van den End Gateway, Zeist, 2000

Companies and other Legal persons under Netherlands and Netherlands Antilles Law

H.C.S. Warendorf and R.L. Thomas Kluwer, Deventer, 2004

Het Handelsregister (the Traderegister)

mr W.R. Veldhuyzen Tjeenk Willink, Deventer, 1998 (2nd print)

Handboek Handelsregister

mr V.A.E.M. Meijers Kluwer, Deventer, 1998

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1

Netherlands

I. Survey

Verzekeringen, Overheidstoezicht en Privaatrecht

mr G.R. Boshuizen Tjeenk Willink, Deventer, 2001

De Europese Vennootschap (SE)

mr H.J.J.M. van Boxel Sdu, Amersfoort, 2005

Toezicht op banken Annemarie van der Zwet

NIBE, Amsterdam, 1999

Van maatschap, vennootschap onder firma en commanditaire vennootschap

Mr A.L Mohr Gouda Quint, Deventer, 1998 (5th print)

De coperatieve Onderneming

R.C.J. Galle Tjeenk Willink, Deventer, 1999

De stichting als ondernemingsvorm

Mr F.J.P. van den Ingh Kluwer, Deventer, 1993

I.

Survey

1 The terms company and the business the company undertakes may cause sometimes confusion. In day to day practice the term company may be used for the legal entity as well as for the business this entity undertakes. The term company in the sense of the business the entity undertakes may be described as the organization, incorporated to participate continuously in the economy. Dutch law provides in a rather strict regulation concerning corporate law. Book 2 provides in the articles for the public company and the private company as well as for associations, foundations, cooperatives and mutual insurance societies. Book 2 provides no definition for a legal entity. The first sections list the public and private corporate bodies possessing legal personality. This results in a rather closed system of corporate bodies. 2 Book 2 is divided in nine titles being: Title 1: General Provisions Title 2: Associations Title 3: Cooperatives/Mutual Insurance societies Title 4: Companies limited by shares (public companies) Title 5: Private Companies with limited liability Title 6: Foundations Title 7: Mergers and divisions Title 8: Regulations of disputes and the right of inquiry Title 9: Annual accounts and annual reports 554

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1. Character of the NV/ BV

Netherlands

3

The general provisions apply to all legal persons. Transgression of the objects, nullity and nullification of resolutions, prohibitions, dissolution and other topics are regulated here. In the general provisions a reference is also made to legal entities who possess legal personality, but which do not operate as companies in the social and economic life (the State, the provinces, municipalities, water control corporations and all bodies who have the power to issue regulations, as well as religious associations, their independent subdivisions and bodies in which they are united) No derogations from the provisions from Book 2 shall be permitted except and insofar as otherwise appears from the law (section 25 Book 2). The provisions with regard to the BV resemble the provisions with regard to the NV a lot. In chapter II both companies are described with the relevant articles and differences.

II. Public Company Limited by Shares (Naamloze Vennootschap – NV – ) and the Private Company with Limited Liability (Besloten Vennootschap – BV –) 1.

Character of the NV/ BV

A company limited by shares is a legal person with an authorised capital divided into 3 transferable shares. A private company with limited liability is a legal person with an authorised capital divided into registered shares. No share certificates shall be issued. The shares are not freely transferable. In both companies the shareholders are not personally liable for acts performed in the name of the company and are not liable to contribute to losses of the company in excess of the amount which must be paid up on their shares (section 64/175 par. 1). The history of the NV goes back to the early 17th century, when Dutch trading companies ‘merged’ into the United Eastindian Company (Vereenigde Oostindische Compagnie – V.O.C. –). This company had ‘shareholders’. The participants in the V.O.C. were liable up to the amount of their participations, and the ‘shares’ (which were issued in a form of participation deeds) were marketable. The history resulted in a structured legislation in 1928 and an extensive amendment in 1971 when the statutory two-tier company (structuurvennootschap) as well as the BV were introduced. One of the reasons to choose for the NV is that the NV has bearer shares, which makes it easier for the shareholder to trade the shares. Furthermore the share holder is anonymous. Another reason may be that the initial capital of the NV at the moment of incorporation is higher than the initial capital of the BV and that an NV has less continuity-problem (since the shares are freely marketable).

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II. Public Company Limited by Shares

4 The reason that the provisions with regard to the BV were implemented in the Dutch Civil Code was a result of the fact that the exceptions for closed companies to publish their annual accounts. In order to exempt these companies to publish, this has resulted in legislation with regard to private (or closed) companies with limited liability in 1971. The legislator has decided to apply the provisions with regard to the public company mutatis mutandis to the private company with limited liability, with the exception of certain prescriptions (no bearer shares, no stock-listed-shares, mandatory share transfer restrictions and transfer of shares by notarial deed). By amendment of the law per January 1, 1984, the exception for publication of the annual accounts for the BV has been abolished. The most significant difference between the BV and the NV is that the BV has no bearer shares, and that the BV-shares are not freely transferable. The articles of the BV must contain the so-called ‘blocking clause’ containing a right of first refusal or the right of approval for the transfer of shares. Other differences appear in the minimum issued capital and with regard to the protection of the capital of the company.

2.

Incorporation

a)

Incorporation procedure

aa)

Deed of Incorporation

5 A company is incorporated by one or more persons by notarial deed. The deed of incorporation has to be executed in the Dutch language (section 65/175). The deed must be signed by each incorporator and by each person who appears from the deed to have subscribed for one ore more shares (section 64/175 par. 2). According to section 62/175 a notarial deed, a declaration of no objections and the act of incorporation is required for the incorporation. The major issue on the incorporation is that the BV shall not issue any share certificate. The shareholders shall be registered in the shareholders register and the articles must contain a blocking clause. bb) Incorporators

6 A company can be incorporated by either natural persons or legal entities. Legal entities can act on behalf of another legal entity in the process of incorporation. Since 1971 a declaration of no objections by the Minister of Justice is required. Before the declaration can be obtained, several questionnaires have to be filled in, giving the department the opportunity to start the necessary enquiries and investigation of the incorporator’s antecedents. Should the department be of the opinion that the company will be used for unauthorised purposes, they have the ability to take measures or ask additional (more detailed) questions. Once the declaration of no objections is issued, the deed of incorporation must be executed within three months after the date of the declaration of no objections. If, for whatever reason the deed is not executed the declaration shall lapse. 556

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2. Incorporation

Netherlands

7

The incorporators may appear either in person (or the representative of the incorpor- 7 ating company) or by power of attorney. Should an incorporator appear by power of attorney, this power of attorney must be in writing (section 65/175). If the incorporator is a non Dutch resident, several additional documents are required, being a bank letter of good-standing, stating that the incorporator is a bona fide person or legal entity (this bank letter must be issued by a respectable bank, according to the usual criteria), and a letter of intent, stating that the incorporator has no intention to within one year after the incorporation of the company, transfer the title to one or more shares of the company to any third party or co-operate to the acquisition by any third party of the right to vote any of the shares of the company. Should the non-Dutch incorporator appear by power of attorney, the signature of the incorporator has to be legalised by a notary or independent lawyer. If the signature is of a representative of a non-Dutch legal entity, the legalisation should also contain a statement by the notary or independent lawyer that the person signing on behalf of the incorporator is authorised to represent the incorporator. Most Dutch notaries will also require articles of incorporation/association of the incorporating company as well as an original extract or certificate of registration of the Trade Register or Chamber of Commerce (if the incorporating non-Dutch company is also registered as managing director or sole shareholder of the company, the Dutch Chamber of Commerce requires an extract or certificate not older than two months – see chapter 2.b). cc) The Articles of Incorporation

The deed of incorporation of the NV/ BV shall be executed in the Dutch language 8 (section 65/175), and this deed must embody the articles of association of the company (section 66/177). The articles shall at least contain the name, the corporate seat and the objects of the company as well as the amount of authorised capital and the number of and denomination of the shares in Euro (up to no more than two units after the decimal point). If the authorised capital of the company is divided in different classes of shares, the articles must contain the number and the amount of each class. The deed states the amount of the issued capital and the paid up part thereof. The deed shall also mention the particulars of the person who subscribes for shares on incorporation. The name shall begin or end with the words “Naamloze Vennootschap” either written 9 in full or abbreviated to “N.V.” or “Besloten Vennootschap” either written in full or abbreviated to “B.V.”. It is no requirement that the name is a Dutch name. The name has, however, to be written in Latin script. All kinds of names are permitted and the incorporator may use a personal name or a fictional name. Names indicating the specialization of the company may be used as well. The name may cause no confusion with other names, either if these names are brand names, trade marks, other company names or whatsoever. A company or natural person entitled to an older name may start legal procedures if he claims that the name causes confusion anyway. The corporate seat of the company must be situated in the Netherlands (section 66/177 10 par. 3). This does not implicate that the company has to have its actual place of business Duco Ottevangers

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11

Netherlands

II. Public Company Limited by Shares

in the place of the corporate seat. The company may have its registered office in a different municipality; the corporate seat is then only relevant for the competence of the court in case of legal acts. Furthermore the company may also have its registered office outside the Netherlands. The corporate seat however, may not be transferred outside the Netherlands. 11 The objects of the company as they have to be mentioned in the articles of incorporation must indicate the main business or purposes of the company. As we can see in most articles of companies in the Netherlands, the description of the objects ends with the sentence: “as well as everything pertaining to the foregoing, relating thereto or conducive thereto, all in the widest sense of the word.” The objects are of any relevance in relation to the representation of the company by the management board. In this matter the management board should only act within the limits set by the objects of the company. dd) Blocking clauses

12 The essence of the private company with limited liability (BV) is that the shares are not freely transferable. The articles of incorporation must contain one ore more provisions with regard to the restrictions on transfer. Insofar as the articles do not restrict or exclude such right, a shareholder may freely transfer one or more of his shares to persons restricted by section 195, being his spouse or registered partner, his relatives in blood and by marriage, in the direct line without any restriction and in the collateral line to the second degree, to a co-shareholder and to the company. The group of persons to whom the shareholder may freely transfer one or more of his shares may be extended in the articles to his blood relatives and relatives by marriage in the collateral line, or to any of the same, to the third or fourth degree (section 195). For any other transfer the articles must contain restrictions on transfer. The restrictions on transfer must provide that the shareholder shall require the approval of a transfer by a corporate body of the company, designated by the articles. The transfer must be effectuated within three months after the approval has been granted. The provision with regard to the approval does not apply if the articles contain restrictions on transfer pursuant to which the shareholder who has the intention to transfer one or more shares has the obligation to offer his shares first to his co-shareholders. These restrictions may also provide that, if the co-shareholders do not accept the offer, the offer must be made to other prospective purchasers proposed by a corporate body of the company as designated by the articles (section 195 subsection 5). The offeror may withdraw his offer at any time, provided he does so within one month after having been informed to which purchasers he may sell all of the offered shares and at what price. If there has been no reflection at all on (a part of) the shares the offeror shall be free to transfer such shares within three months from the establishment of this fact.

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Netherlands

13

A restriction on transferability is not permitted if this results in an impossibility to transfer or if the transfer will become exceedingly onerous. The transfer restrictions shall not apply if the shareholder is obliged by law to transfer his shares to a former holder (i.e. in case of nullity of a former transfer) The articles may provide that a shareholder must offer and transfer his shares in the instances specified in the articles. In such case the articles may provide that, for so long as a shareholder does not comply with his obligations to offer for transfer, his rights to vote, to attend a general meeting and his right to distributions shall be suspended (section 195a) In this respect the articles may provide that for so long as a shareholder has not, within a reasonable period complied with his obligation to transfer the shares, the company shall be authorised (irrevocably) to offer and transfer his shares. The provisions must be such that a shareholder who so requires receives a reasonable price for his shares (equal to the value of the shares) ee) The capital of the company

In order to make a company operate properly it is necessary that the company has some 13 form of liquid assets. The first step to create assets is made in the process of the incorporation of the company by the contribution of any kind of capital to the company. The articles shall mention the amount of the authorised capital (section 67/178). The authorised and the issued capital must amount to at least the minimum capital. The minimum capital shall be forty-five thousand Euros (section 67 par. 2) for the NV and eighteen thousand Euros (section 178 par. 2) for the BV. The minimum capital is determined by General Order. The paid up part of the issued capital must be at least forty five thousand/eighteen thousand euro, and at least one fifth of the authorised capital must be issued. The contribution of the capital to the company (either in the process of incorporation 14 or at a later stage) can be made in cash or in kind. Each of the contributions can be made in different manners (as share premium or as contribution on shares). If a company limited by shares was incorporated before 1 January 2002, the articles may mention the amount of its authorised capital and the denomination of shares in Guilders. Should a company, however, amend its articles of association; it is obliged that the amendment should contain conversion of the shares from guilders to euros. If payment on the shares is made in cash prior to or on the incorporation, one ore more statements must be attached to the deed of incorporation, stating that the amounts, which must be paid up on the shares to be issued on incorporation: a. either will be at the disposal of the company limited by shares immediately upon its incorporation (a-statement); b. or stood in a separate account on a fixed date, no earlier than five months prior to the incorporation which, after the incorporation, shall be exclusively at the disposal of the company, provided that the company accepts such payments in the deed (b-statement). (section 93a/203a, paragraph 1) Duco Ottevangers

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Netherlands

II. Public Company Limited by Shares

If the payment is made in a foreign currency, the statement must state the amount into which this currency is freely convertible at the rate of exchange applicable at the date of payment. The statements may only be issued by a bank which is a credit institution in the EU. These banks are considered to as credit institution if section 1, subsection 1(a) of the Credit System (Supervision) Act 1992 is applicable or if its business is subject to governmental supervision in another State of the EU or in another state which is a party to the Agreement on the European Economic Area. The bank statement may only be issued to a notary. 15 If, prior to the incorporation, amounts are withdrawn from the account, the incorporators shall be jointly and severally liable to compensate for the company such amounts. This only until the company has expressly ratified the withdrawals. Next to the payment in cash, the Dutch law provides the possibility to pay on the shares, other than in cash, being a contribution in kind (or a non-cash contribution). If a non cash contribution has been agreed, a valuation of such contribution according to economic standards must be possible. The obligation to provide services or to perform work is not valuable and therefore not contributable. 16 If, on the incorporation, it is agreed that a non-cash contribution shall be made on the shares, the incorporators shall prepare a description of the contribution, stating the vale attributed thereto and the valuation methods applied (section 94a/204a). The methods of valuation must satisfy generally acceptable standards. The description shall be signed by all the incorporators and shall be attached to the deed of incorporation. An accountant must confirm that the value of the non-cash contribution to be made at least equals the amount payable as a capital contribution expressed in currency. If after issuance of the description it occurs that the value has decreased substantially, a second certificate shall be required. In some conditions a description by an accountant is not required. 17 These conditions are for the NV: if the incorporators have resolved to waive the preparation of the description by the experts, if one ore more legal persons to whose annual accounts Part 9 of book 2 (annual accounts sections) applies have subscribed for all of the shares to be issued against a non cash contribution, if the contributing legal person has a freely distributable reserve which equals the nominal amount of the shares to be issued and subscribed for by the legal person, if the contributing legal person declares that it will make available an amount of at least the nominal value of the shares for which it subscribes for, for payment of debts of the company to third parties, if each contributing legal person has deposited at the commercial registry its last adopted balance sheet with explanatory notes with the accountants declaration thereon, if each contributing legal person sets aside a reserve equal to the nominal amount of the shares for which it subscribes for (section 94 a subsection 3); 18 And for the BV: if the legal person has deposited with the commercial registry at which the company is registered a certificate that it assumes joint and several liability for the 560

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obligations arising from any legal acts of the company, if the last adopted balance sheet with explanatory notes has been adopted and audited in accordance with the applicable law and if the shareholders’equity of the legal person shown in the aforementioned balance sheet exceeds the paid up nominal value of the shares on which a contribution is made (section 204a subsection 4). ff)

Date the company comes to existence

Even tough the registration of the Company is an important element in the incorpora- 19 tion procedure it is not a requirement for the existence of the company. However, the incorporators /first directors are obliged to register the Company, within eight days after the incorporation. The company starts to exist as a legal person at the moment the declaration of no objections is obtained with the Dutch Ministry of Justice and the deed of incorporation has been executed by a civil law notary. gg) Opening of bank accounts

Each natural person and each legal entity is able to open a bank account in the 20 Netherlands. However, from June 1, 2003, financial institutions, such as banks and insurance companies (but also auditors, tax consultants, lawyers and notaries public) are legally required to formally ascertain the identity of a client before providing any service(s) due to the new ‘Identification Act’ (Wet Identificatie Dienstverlening – WID –). In case of an individual, the identity can be determined by means of valid travel documents (under provisions of the Passport Act), a valid driving license, a document that non-Dutch persons must possess under the (Alien) Immigration Act 2000 to prove their identity and their legal residential status. In the case of legal entities, identity can in principle be determined by means of a certified extract of the organisation’s registration at the Chamber of Commerce. If a legal entity is in the process of incorporation, the entity may be registered as company ‘to be incorporated’ with the Dutch Trade Register. b)

Registration procedure/Commercial Register

The directors shall have the company registered in the commercial register and shall 21 deposit at the commercial registry an officially certified copy of the deed of incorporation and of the documents attached thereto pursuant to the law. At the same time they shall file a statement showing the total of the established and estimated expenses for the account of the company connected with the incorporation (section 69/180) If the company is represented by the directors before the company is registered with the Trade Register as mentioned above, the directors shall be jointly and severally liable, together with the company. This is also applicable if the company is represented before the paid up part of the capital of the company amounts at least the minimum capital prescribed on incorporation and before at least one-quarter of the nominal value of the capital issued on incorporation is paid up.

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Netherlands

II. Public Company Limited by Shares

22 In the Trade Register the company registers next to the deed of incorporation its corporate seat and its full office address. Should the company have only one shareholder, this sole shareholder should be registered as well. Furthermore all managing directors, proxy holders and supervisory board members have to be registered together with a deposit of their original autograph. As mentioned the deposition of the deed of incorporation should contain the documents attached thereto pursuant to the Dutch Civil Code. These documents contain the statements of the payment on the shares, either in cash (being a bank statement) or in kind (being an auditor’s statement) The obligation to register the company with the Trade Register plays an important role in the regulations with regard to the representation authority of the company, the annual accounts of the company and capital protection-rules. The Trade Register Law prescribes furthermore a protection for third parties unaware of the company details if these details have not been registered despite the obligation thereto in the Trade Register Law (article 18 Trade Register Law). The article is linked with the obligation for companies to register their details with the Trade Register (section 69/180). c)

Approval requirements for special companies

23 If a large company to be incorporated has the intention to operate as a bank, an insurance company or an investment institution there are several restrictions and requirements. aa)

Bank

24 According to section 415 a bank shall mean: a credit institution registered pursuant to subparagraph a of section 52, subsection 2 of the Credit System (Supervision) Act 1992 (Wet Toezicht Kredietwezen). The Credit System Supervision Act forbids operating as a bank in the Netherlands without having the appropriate licenses, issued by the Dutch Bank (De Nederlandse Bank – DNB). The Dutch Bank will issue the license if several requirements according to the Act have been met. These issues concern mostly the liability and the expertise of the managing directors, the objects of the bank (to be incorporated) en the extent of the equity capital. The obligation to obtain a license also counts for foreign banks, having the intention to offer their services in the Netherlands. The Dutch Bank holds a register, in which the company to whom a license is issued are registered. Also the license holders, being Dutch branches of foreign EU-banks or institutions who are authorised to operate in the Netherlands according to their European passport (and who have followed the notification procedure according to the Act) are registered by the Dutch Bank.

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bb) Insurance Company

The supervision on insurance-companies is regulated in the Insurance Business (Super- 25 vision) Act 1993 and the Funeral Services Business Insurance (Supervision) Act. These laws contain first of all the substantive laws with regard to the legal form, the managing directors, the administrative organisation, the provision of information to the policyholders and the public. But first of all the admission to the practise of an insurancecompany depends on the obtaining of a license thereto by the Dutch Insurance Chamber. Both banks as insurance companies have extensive provisions in respect of the Balance Sheet and Notes thereon, as regulated in the sections 417-426 and 429-436, and the profit and loss account and the notes thereon (437-440) Furthermore, according to sections 416 and 428 Book 2 Dutch Civil Code, the main part of the articles which are applicable on the ‘normal’ public company, also apply on a bank or insurance company cc)

Other companies requiring a license or special supervision

Next to these the Dutch Bank also supervises investment institutions and exchange 26 offices. Regulations with regard hereto can be found in the Investments Institutions (Supervision) Act (Wet Toezicht Beleggingsinstellingen) If a company has the intention to start an investment institution, a license has to be issued by the Dutch Bank (next to the basic requirements to start a company in the Netherlands). The Securities Board of the Netherlands (Stichting Toezicht Effecteninstellingen) supervises the stock market, stock exchanges and stockbrokers. Special regulations in this matter can be found in the Securities Transactions (Supervision) Act (Wet Toezicht Effectenverkeer). d)

Shelf Companies

In some cases it might be easier for an incorporator or a purchaser to obtain a shelf 27 company. Particularly if a foreign entity wants to obtain a Dutch company by means of a so-called purchase-holding (koopholding) or has the intention to incorporate a company in the Netherlands, but wants to avoid the route through the Ministry of Justice, a shelf company may be of any convenience. The Ministry of Justice has introduced some legislation however, to avoid the trade in shelf companies. In this matter the declaration of no-intention at the incorporation of companies is valid for three months, and if a incorporator has the intention to sell its shares, or if the shares are sold, within a year after incorporation of the company, a notification to the Ministry is obligatory. This also counts if a new managing director is appointed by the shareholders within one year after incorporation. It is however doubtful if these matters really contribute the discouragement of the abuse of companies. Shelf companies will not be totally prevented by this since an incorporator may always put a company ‘on-the-shelf ’ directly after incorporation, and start trading it after the one-year term.

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Netherlands

II. Public Company Limited by Shares

The advantage of obtaining a shelf company is obvious. It can be done in a relatively short period and the costs of incorporation are avoided. There is no procedure with the Ministry of Justice necessary and upon obtaining the shelf company a bank account can be opened in the Netherlands (if however an extract of the Trade Register is available). 28 The disadvantages may be bigger however. Both shareholder and managing director are responsible for the day-to-day business in the company, and if these activities are or have been illegal, they may be liable according to the liability of managing directors by misconduct (according to section 9, 11 or 138 book 2) or the liability for shareholders if the shares are not fully paid up. Next to this the trade in shelf companies may be of any influence for the former shareholders or managing directors of the shelf companies, if the company is liquidated or goes bankrupt within one year after the purchase of the shelf company. If the former shareholders or managing directors are or will be involved with the incorporation of one or more new companies, the Ministry may ask them additional questions with regard to the already sold shelf company. e)

Costs/Duration

29 In order to effectuate the process of incorporation several costs have to be made. Apart from the costs of the legal advisors (of which a notary is mandatory with regard to the incorporation of the public company by notarial deed) the company or shareholders have to make several other costs. First of all the shareholders have the obligation to make the minimal contribution on the shares. If the company has agreed with their shareholders that an additional contribution by means of share premium has to be made, this amount has to be paid as well. In this matter there is a possibility that it may be provided that a part, not exceeding three-quarters of the nominal amount, need only be paid after a call therefore has been made by the company (section 80/191). This only concerns the part of the nominal capital on the shares. If an extra share premium has been stipulated this part has to be paid up (the so-called obligatory share premium), but this only counts for the NV. The additional costs a company copes with upon the incorporation are the costs of the Ministry of Justice (for the declaration of no intention), the costs of the Chamber of Commerce (to register the company with the Trade Register, but also if the incorporators desire a trade name search) and the capital tax (according to section 32 of the Legal Transactions Act each company bringing together capital divided in shares in entities established in the Netherlands has to pay an amount of capital tax of fifty-five hundredth percent – 0.55% – of the initial capital paid on the shares). The term in which a company in the Netherlands can be incorporated depends on the effectiveness of the incorporators and their legal advisors. The obtaining of the declaration of no objections with the Ministry of Justice takes approximately two weeks. However, if an incorporator or one or more managing directors have a foreign nationality, the Ministry has the authority to start a more thorough investigation, by asking 564

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Netherlands

30

detailed questions about the activities the company wishes to employ, the shareholders and their (ultimate) shareholders abroad, in some cases bank references from the country of origin or original extracts from the Trade Register from the country of origin. Apart from that foreign incorporators have the obligation to provide the documents as set out in paragraph 2.a) here above. f)

Pre-incorporation status

Right and obligations shall vest in a company from legal acts performed prior to its 30 incorporation only if, after its incorporation, it expressly or implicitly ratifies such legal acts or is bound pursuant to subsection 4 (section 93/203). In subsection 4 it is stated that the incorporators may bind the company in the deed of incorporation only by the issue of shares, the acceptance of payments there-on, the appointment of directors and members of the supervisory board and the performance of any legal acts referred to in section 94/204a, subsection 1, meaning the legal acts with regard to the agreement with the company to pay on the shares in kind (see paragraph 2.a)). Persons who perform a legal act in the name of a company to be incorporated shall, unless the contrary is expressly stipulated in respect of such legal act, be bound jointly and severally thereby until the company has ratified such legal act after its incorporation (section 93/203, subsection 2). This may not have as a result that the company can not meet its obligations upon ratification. If a third party runs the risk that a company does not ratify the legal acts or that the company can not meet the obligations resulting from legal acts done before incorporation, the persons who acted on behalf of the company to be incorporated shall be jointly and severally be liable for any loss sustained by a third party as a result thereof if these persons were aware, that the company could not perform its obligations, without the prejudice to the liability of the directors in respect thereof on account of such ratification. If the company is put into bankruptcy or involuntary liquidation within one year after its incorporation, such knowledge that the company could not perform its obligations shall be presumed (section 93, subsection 3).

3.

The Shareholder

a)

Rights and duties of a shareholder

As shareholder of a company one has several rights but also several duties. The rights 31 may be divided into controlling rights and financial rights. Principally the shares contain all the same rights, in proportion to their amount. Principally, as the articles may decide otherwise. Preference shares may give several preferences at the appropriation of profits or the liquidation (and the winding up). Priority shares may give extra privileges as well.

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Netherlands

aa)

Dividend

II. Public Company Limited by Shares

32 First of all there is the right on the payment of dividend if the general meeting decides to pay dividend (section 105/216: save as otherwise provided by the articles, the profits shall accrue to the shareholders). However the company may make distributions to the shareholders and other persons entitled to distributable profits only to the extent that its net assets exceed the sum of the amount of the paid and called up part of the capital and the reserves which must be maintained under the law or the articles (section 105/ 216, subsection 2). bb) General meeting /voting rights

33 The shareholders have off course their voting rights in the general meeting of shareholders. Any powers not conferred upon the management or other persons shall be vested in the general meeting of shareholders, within the limits set by the law and the articles (section 107/217). One or more shareholders, who jointly represent at least one-tenth of the issued capital, or such lesser amount as is provided by the articles, may, on their application, be authorised by the interim provisions judge of the court to convene a general meeting (section 110/220). The interim provisions judge shall only approve this if it is fully clear that such a request has been denied by the management or the supervisory board or if these organs did not take the necessary steps upon the request. Each shareholder has the right to attend a general meeting of shareholders, either in person or represented by a person holding a written power of attorney, to address the meeting and to exercise his voting right. The articles of association may limit the rights of shareholders to have themselves represented. The articles may also provide that a shareholder shall not be entitled to participate in a general meeting for so long as he is in default in complying with an obligation under the law or under the articles (section 117/228). cc)

Information

34 Article 107/217 also vests the rights on information for the shareholders. The management and the supervisory board have the obligation to provide the shareholders with all the requested information, unless reasons of important interest decide otherwise. dd) Contribution

35 Apart from the obligation for the shareholders to make contributions on the shares, the shareholders have the right to contribute extra on the shares (the so called share premium). If the shareholders have agreed to contribute the share premium upon the incorporation, the share premium is obligatory. If the shareholders wish to make voluntary contributions they have the right to do so. ee)

Minority rights

36 Even though most of the groups-of-companies consist of one or more companies, of which the shares are held directly or indirectly for one hundred percent by the group 566

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holding there is the possibility that there are still minority shareholders in a group of companies. The position of a minority shareholder is different. In fact he is equal to all other shareholders, but as a result of that he shall have to compromise himself to the decisions made by the majority shareholder. This however, does not mean that the majority shareholder can always ignore the positions or interests of the minority shareholder. The majority shareholder can not decide to pass dividend-distributions during a long term of years without being reprimanded (this is not law, but legal precedents). The minority shareholders can decide to have a shareholders resolution tested in accordance with the principles of reasonableness and fairness. In case of the BV a person who as a shareholder and for his own account contributes at 37 least 95% of the issued capital of the company may institute proceedings against the other shareholder jointly for the transfer of their shares to the claimant. The same shall apply if two or more group companies contribute such part of the issued capital jointly and jointly institute proceedings for the transfer to one of them (section 201a). In case of a private company, this may occur more often than in case of a public company, since the public company normally has several shareholders. The private company is more compact and conveniently arranged thereto. b)

Shareholders meetings

A much heard but also much disputed remark is that the general meeting of share- 38 holders is the organ with the highest power within a company. As a fact this statement may give a distorted view of the actual situation. Off course the general meeting plays an important role in the company, but there has to be some balance between the interests of the general meeting and the interests of other organs involved in the company. aa)

Function

De function and authorities of the general meeting of a company may differ from time 39 to time. The authority depends on the range of authorities given to the shareholders in the articles. Possible decisions may be the issuance of shares, the purchase of own shares by the company, withdrawal of shares, the approval of decisions of the management board, as well as the regular authorities to approve the annual accounts, approve amendments of the articles, conversion of the company in another legal entity and dissolution of the company. In this respect one may say that the general meeting may be considered the most important organ of the company. bb) Calling of a meeting

Dutch law prescribes that at least one general meeting shall be held each year (section 40 108/218) within six months after the end of the company’s financial year. Notice convening a general meeting shall be sent to the shareholders and to the holders of depositary receipts issued for shares with the cooperation of the company. For the NV a notice convening a meeting shall also be given by publication in a daily newspaper with national circulation. The articles may provide that meetings of holders of registered

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Netherlands

II. Public Company Limited by Shares

shares shall be convened by a convening notice addressed to the addresses of those shareholders mentioned in the shareholders register (section 113/223). 41 The notice of a meeting shall state that the subjects which will be processed during the meeting. At the same time there will be mentioned that the shareholders and the holders of depositary receipts have the ability to take notice of the subjects at the offices of the company (section 114/224). Unless a resolution is passed unanimously at a meeting at which the entire issued capital is represented, no legally valid resolutions may be passed in respect of matters not on the agenda in the notice convening a meeting. The information which must be addressed to the shareholders or the holders of depositary receipts according to the law or the articles of association may be included in the notice convening the meeting or in the documents which are deposited at the offices of the company. The general meeting of shareholders shall be held in the statutory seat of the company. Should the meeting be held in another place, legally valid resolutions may only be adopted if the total issued capital is represented (section 116/226). cc)

Competence

42 Each shareholder has the right to attend a general meeting. The meeting may be attended by representatives of the shareholders holding a written proxy. Shareholders and holders of depository receipt have the same rights at the meeting. However, only shareholders have voting rights. Pledgees and holders of the right of usufruct can also attend a general meeting. In some cases they may even have voting rights. There are no legal provisions with regard to the chairmanship of the general meeting. The articles of association need to provide the regulations thereto. The task of the chairman is not unimportant. He leads the general meeting, maintains the order and determines the atmosphere of the general meeting. The chairman also needs to supervise the signing of the attendance-list, containing the names and addresses of the holders of voting rights, pledgees, holders of the rights of usufruct and the number of votes to be issued by them. The chairman also determines the manner in which the votings are held (by show-of-hands or by ballot). Save as otherwise provided in the articles, the ruling pronounced by the chairman at a meeting shall be decisive (section 13). If, immediately after the ruling pronounced by the chairman, its correctness is contested; another vote shall be taken if so desired by the majority at the meeting. As a result of such new vote the legal consequences of the original vote shall lapse. dd) Oligarchic clauses

43 If a company has very regular articles of association, containing no special regulations, it can be said that there is a ‘classic company’: the management board manages, the supervisory board provides the supervision and the general meeting determines the annual accounts, appoint and discharges the directors and supervisory directors and determines to issue shares and amend the articles. 568

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Netherlands

Dutch company law contains several structures to control spread of power within the company or limit the power of the general meeting of shareholders or several individual shareholders. This is what is called ‘oligarchic clauses’. The most common are the clauses in which the influence of the general meeting or individual shareholders is limited. The most common is the oligarchic clause as set out in section 133/243 which contains regulations with regard to the appointment of managing directors (out of a list of candidates). In this matter the authority of the general meeting transfers to those making the list of candidates (in general the supervisory board). Other oligarchic clauses are: – the delegation (statutory or by general meeting) to the management board of the authority to decide to issue shares, eventually under exclusion of the right of first-refusal; – the statutory delegation of the power to issue shares to another company-organ than the general meeting (only in a private company with limited liability) – the appointment of the authorisation to acquire shares in its own capital to another corporate body than the general meeting (only in a private company with limited liability); – limitation of the general meeting to amend the articles of association or to dissolve the company. c)

44

Shareholders resolutions

Resolutions will be passed over convened topics. The agenda is drafted in the notice 45 convening a meeting. As mentioned before, amendments or additional items on the agenda can only be made in a meeting, if the resolution is passed unanimously in a meeting representing the complete issued capital. The general meeting can only pass resolutions if the shareholders have been informed properly. This obligation lies with the management board and the supervisory board. aa) Quorum/majorities

Unless determined otherwise by law or in the articles of association, all resolutions in a 46 general meeting shall be passed by an absolute majority of the votes cast (section 120/ 230). The validity of a resolution shall not depend on the proportion of the capital represented at a meeting, unless the law or the articles otherwise provide. If there is a tie in voting at the election of persons, a drawing of lots shall determine the issue. The law does not limit a supermajority of votes, except with the appointment and/or dismissal of managers and supervisory board members. For all other matters the articles may require all kinds of supermajority and even determine that some resolutions can only be taken unanimously. Articles with regard to a quorum are allowed unrestrictedly, except for the cases mentioned above in which only the representation of more than half of the issued capital may be required. If the articles provide that the validity of a resolution shall depend on the part of the capital represented at a meeting and such part was not represented at the meeting, then, unless the articles otherwise provide, e new meeting may be convened at which the resolution may be passed, irrespective of the part of the capital represented at Duco Ottevangers

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Netherlands

II. Public Company Limited by Shares

such meeting. In the notice convening a new meeting it must be stated, giving the reason therefore, that a resolution may be passed, irrespective of the part of the capital represented at a meeting (section 120/230, subsection 3). bb) Limitations of voting rights

47 In general each share gives the right to one vote. The law provides also other regulations, if the limitations of the law are taken in mind. The articles may provide that a shareholder shall not be entitled to exercise the right to vote as long as he is in default in complying with an obligation under the law or the articles. If the authorised capital is divided into shares of an equal nominal amount, each shareholder may cast as many votes as he holds shares. If the authorised capital is divided into shares of unequal nominal amounts, the number of votes of each shareholder shall equal the multiple of the nominal amount of the smallest share included in the aggregate nominal amount of his shares. Fractions of votes shall be disregarded. The articles of association may disqualify certain persons, their spouses, registered partners, and blood relatives in the direct line, from voting on resolutions in which the company grants rights to or waives the obligations of such persons, other than in their capacity as members, shareholders or members of a constituent body (section 12). cc)

Resolutions outside a meeting

48 Unless bearer shares or depositary receipts issued for shares with the cooperation of the company have been issued, the articles may provide that resolutions of shareholders may be passed otherwise than in a meeting. If the articles contain such provisions, resolutions may only be passed by unanimous vote of the shareholders entitled to vote. The votes may only be cast in writing (section 128/238). The fact that the votes may only be cast in writing is a matter of evidence. If one of these regulations is violated, no resolution has been taken. This is not a matter of being null and void. In this case the resolution simply has not been taken, because not meeting has taken place and the regulations of section 128/238 have not been met. If a provision with regard to resolutions outside a meeting is not available, it is not allowed to take such resolutions. With regard to the abovementioned each resolution can be withdrawn, by taking another resolution revoking the earlier resolution. This resolution has to satisfy the same formal requirements as the revoked resolution. If the former resolution however has an external effect, such as the appointment of directors, and this appointment has been accepted, the revocation sorts no effect. The same goes for resolutions which already have been carried out such as amendments of articles or an issuance of shares.

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dd) Challenging of resolutions

The Dutch law provides in the articles general regulations with regard to nullity and 49 voidableness of resolutions of organs of the company. The articles are applicable on all company-organs and all the resolutions taken. With regard to resolutions taken a difference can be made between three types of resolutions a) non existent resolutions: meaning that the resolutions sort no effect whatsoever since they have never become effective, for example because a certain quorum never has been achieved; b) affectable resolutions: meaning resolutions which are void or null; c) non perfect resolutions: meaning resolutions which are in fact legally valid but need to be ratified by another entity or organ. (1)

Ad a

A vote is null and void in the instances in which a unilateral act is null and void; a vote cannot be annulled (section 13) The voidableness of a vote means that this vote never has been cast, which has the consequence that the votes may be recounted, resulting in the fact that a resolutions has not been adopted. In this case the resolution does not exist, unless reasons of reasonableness and fairness conclude otherwise. (2)

Ad b

A resolution that is contrary to the law or the articles is null and void, unless another consequence follows from the law (section 14). The law provides an exception directly in section 15 with a few of the possibilities providing capabilities of being annulled. If a resolution is null and void because it has been taken despite the lack of a prescribed act or a notification to another company-organ, it can be ratified by the this other. A resolution which may be the subject of a claim for avoidance may be ratified by a resolution to that effect; for such resolutions the same conditions shall apply as those applicable to the resolution to be ratified (3)

Ad c

In this matter the resolution may also be ratified in the same way as mentioned above under b. d)

Shareholder exclusion

The Dutch law does not now the exclusion of shareholders in general. Only the right to 50 vote can be excluded, or certain persons may be disqualified as a shareholder in the articles if the resolutions concern, grants rights to or waive the obligations of such persons, other than in their capacity as members, shareholders or members of a constituent body (section 12) Furthermore the articles may provide that a shareholder shall not be entitled to participate in a general meeting for so long as he is in default in complying with an obligation under the law or the articles (section 117/227 subsection 3)

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Netherlands

4.

The NV Share/ BV Share

a)

Types of shares

aa)

Bearer shares

II. Public Company Limited by Shares

51 The most important characteristics which distinguish the public company and the closed company with limited liability are: a) a closed company can not issue share certificates and the public company need not to issue share certificates b) the freedom of transferring shares needs to be limited in the closed company by means of a blocking-clause and may be limited in the public company c) the shares in the closed company need to be registered shares and the shares in the public company may be registered shares (but also bearer shares) By issuance of bearer shares, the bearer becomes the shareholder of the company. The company may desire that the shareholder legitimates himself with the issued document. Bearer shares certificates may be issued to the shareholder only if at least the full amount due on such shares has been paid. If, as a result of amendment of the articles of association, shares issued in bearer form become registered, the shareholder may not exercise the rights vested in a share until after he has lodged the share certificate with the company. These provisions shall apply, mutatis mutandis, if holders of shares in bearer form become holders of registered shares as a result of a merger or a division, upon the understanding that it will suffice to lodge the share certificate (section 82). With regard to the bearer shares of larger listed public companies there are additional regulations in the Securities Transactions Act. According to this law the Dutch Stock Exchange is regulated, as well as the trade in shares. The trade in stock listed shares depends on the regulations in the Securities (Bank Giro Transactions) Act. The purchasers and sellers of shares keep an securities amount with an affiliated institution (affiliated with an central institute, which central institute looks after the stock market trade). The interest of shareholders is kept by a regular trade. The shareholders of shares in listed company have these shares in the first place as an investment. These shareholders do not have the intention to operate a company or business, but profit from the amounts of dividend the shares provide. The regulations the Dutch Stock Exchange (Euronext) observe have been written in favour hereof. In this respect the ‘commissioner for the listings’ and the management board of Euronext, have the authority to suspend a certain listing in cases of irregularities, abnormal price-fluctuations or other irregularities. Abnormal price fluctuations may occur in cases of an public offer on shares, or if such an public offer is expected.

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bb) Registered shares

The NV may have several reasons to create only registered shares in the articles of 52 association. This because the NV may attach importance to knowing who the shareholders are. The type and form of shares are determined in the articles. The BV only knows registered shares. Registered shares may also be created in order to prevent a hostile take-over. The articles of the company may determine that no shareholder may keep more than one percent (1%) of the issued capital by way of shares. A larger interest can only be kept by means of depositary receipts. Only the articles of the NV may comprise regulations with regard to fractional shares (‘‘onderaandelen’’). Fractional shares are the fractions into which the shares are or may be split pursuant to the articles (section 79). The legal provisions in respect to shares and shareholders also apply to fractional shares and holders of fractional shares, unless the contrary appears from these provisions. cc)

Preference shares

Next to the normal (bearer or registered) shares, the company may also have preference 53 shares, priority shares or letter-shares. In the articles it is possible to create also other types of shares. The difference between the types of shares points out that corporate law knows a large flexibility to provide shares with special rights. The legal base for these rights needs to be vested in the articles. Preference shares may be bearer or registered shares. Depending on the articles of association the preference shares provides preference with the distribution of dividend or with the distribution of the balance left after winding-up or both. Normally a preference share provides a right on a preferential dividend of a certain statutory determined percentage. No other dividend over the company’s profits is paid. The amount over which the percentage is determined is stated in the articles. Apart from the regular preference shares, the articles may also create different kinds of preference shares. Financing-preference-shares provide a preference over the nominal value as well as over the deposited share premium. Participating-preference-shares provide a right on a larger amount of dividend. After distribution of the same amount of dividend on the normal shares as well as on the preference shares, the preference shares share in the further profits together with the normal shares. Furthermore the preference shares may have a cumulative position, meaning that if no profits or not all profits have been distributed in a certain year, these profits will be credited on the shares and paid in the following year as far as the profits allow distribution then. At last a company has the possibility to issue protective-preference-shares. In case a hostile take-over is feared, the company has the ability to issue these preference shares to a related company or a special purpose foundation (or another special purpose entity), in order to avoid the take-over. Duco Ottevangers

573

54

Netherlands

II. Public Company Limited by Shares

dd) Priority shares

54 Priority shares are shares to which certain priority-rights are attached according to the articles of association. The purpose of priority-shares is to create a certain difference between the powers of shareholders within the company apart from the nominal shareholding. With the priority shares it is possible to vest the power within the company in the shareholders of these shares, providing them with certain controlling rights. The limits of these rights are determined by the authorities which cannot be withdrawn from the general meeting of shareholders. Within these limits the authorities are transferred from the general meeting of shareholders to the (general meeting of) priority-shareholders. Differences can be made between own rights, approval rights and initiativerights. Furthermore the priority-shares create the possibility to control the company with oligarchic clauses, for example with binding nominations. Although priority-shares are a part of the capital of the company, mostly the priorityshareholders are not interested in the financial rights of the shares. Normally these rights are limited (i.e. to a maximum percentage) because of the fact that the shareholders prefer to have a priority in controlling the company. ee)

Letter shares

55 Letter-shares are used to divide shares having an equal right to the profits and the controlling rights of the company into different groups. The articles of association determine which rights are attached to which groups of shares. Furthermore the articles can create different share premium reserves, attached to the different groups of shares, together with different dividend-reserves. In this way it is possible to create a different dividend-policy per group of shares. Next to this holders of shares with a certain letter may have pre-emptive rights at the issue of the same shares with this letter. This tool is often used if different families participate in a company and these families whish to maintain their mutual relationship in good harmony. Fiscal issues may also give reasons to create letter shares. Especially when the different groups of shareholders are divided into shareholders /natural persons and shareholders / companies. The companies receiving dividend have the ability to rely on the participation exemption while natural persons are obliged to pay income tax over received dividend. Shareholders may therefore decide to leave their dividend within the company. b)

Transfer of shares

aa)

Legal requirements

56 The current regulation for transfer of registered shares dates from January 1, 1993. The regulations also relate to the issuance of shares, granting of shares at a legal merger, splitting of shares and the vesting of restricted rights. The regulation applies to closed companies with limited liability and public (not stock listed) companies. The overall thought is that the transfer of a registered share requires a notarial deed.

574

Duco Ottevangers

4. The NV Share/ BV Share

Netherlands

57

A bearer share in a public company is transferred by handing over the share certificate. A shareholder has therefore, in the case of bearer shares, always the right to handling over the share certificate. Because of the fact that most of the bearer shares in the Netherlands are shares in stock-listed companies, and large amounts are traded, Dutch law provides other regulations with regard hereto (see paragraph 4.a)). The issue and transfer of a registered share, not being a share referred to in section 86c 57 (stock-listed registered shares), or the transfer of a limited right thereto, shall require a notarial deed, the parties to which shall be all persons concerned. No separate instrument is required for an issue of shares which are subscribed on incorporation. Instruments (notarial deeds) for an issue or transfer must state: a) the basis of the legal act and the manner in which the share or the restricted right thereto is acquired; b) the name, forenames, date and place of birth, place of residence and address of the natural persons who are parties to the legal act; c) the legal type, name, place of residence and address of the legal persons who are parties to the legal act; d) the number and class of shares to which the legal act relates; and e) the name, place of residence and address of the company the shares of which are the subject of the legal act. (section 86/196) The transfer of shares may be effectuated, even if the registration in the shareholders register thereof has not taken place. The registration has no constitutive effect. However, the company and third parties in good faith, may consider the shareholders as registered in the shareholders register as their shareholders. The fact that the registered shareholder is in fact no shareholder cannot be invoked against them. bb) Company approval

A transfer of a registered share or a transfer of a limited right thereto in accordance with 58 section 86/196 shall, by operation of law, also have effect against the company. Save when the company is itself a party to the legal act, the rights attached to the share may be exercised only after the company has acknowledged the legal act or the instrument has been served on it in accordance on the basis of the submission of a notarial copy or extract of the instrument, or it has acknowledged the same by registration in the shareholders register. A company which has knowledge of a legal act as mentioned above may, as long as neither acknowledgement thereof has been requested nor service of the instrument has been made on it, acknowledge such legal act of its own by the registration in its shareholders register of the transferee of the share or the limited right thereto. cc)

Blocking clauses

The NV with registered shares has the possibility to insert a blocking clause in its 59 articles of association. In that case a transfer of registered shares contrary to the blocking clause is null and void. A blocking clause or restriction of the transferability of shares may not be such as would render transferability impossible or exceedingly onerDuco Ottevangers

575

60

Netherlands

II. Public Company Limited by Shares

ous. The same shall apply on allocation of shares from joint-held property. In case of a BV a blocking clause is mandatory (see paragraph 2.a)). Where the articles provide that a shareholder requires approval for a transfer from a corporate body or from third parties, the approval shall be deemed to have been granted if no decision on the request was made within a period not exceeding three months specified in the articles or if, simultaneously with the refusal of the approval, the shareholder is not given information on one or more prospective purchasers who are prepared to buy the shares to which the request for approval relates. Where the articles provide that a shareholder who wishes to dispose one or more shares has the obligation to offer the shares first to co-shareholders or to a third person to be designated by a corporate body, the provisions must be such, that a shareholder who so requires will receive a price equal to the value of his share or shares to be transferred, as established by one or more independent experts. A shareholder may withdraw his offer, within one month after he is informed who the prospective purchasers will be and to which price he can sell the share or shares. The company itself may be a prospective purchaser also. The provisions in the articles with regard to a blocking clause or a restricted transferability of shares shall not apply when the shareholder must, by law, transfer his share to a prior shareholder. dd) Costs

60 Depending on the range of the number of shares and the impact on the transfer of shares the costs may vary in several manners. Should the transfer of shares be related to a large restructuring, a extended sale, purchase and transfer of the company (with all sorts of guarantees, warranties and other formalities whatsoever), a management buy-in or management buy-out the costs of the transfer of shares (in particularly the notarial costs) mostly are in no proportion to the costs of all other legal advisors the different parties use in the process. In most of these cases the process of negotiating and the bidding process starts without the knowledge of legal advisors. Mostly the process begins with a legal, fiscal, and economical due diligence, followed by the negotiating process. Drafting of the agreements and other related documents require thorough legal investigation and thus costs for legal advisors. Should the transfer of shares, however, be of minor importance, for example if the shares are transferred within a family or inter-company, in most cases a notarial deed of sale-purchase and transfer will be sufficient and the costs will be likewise. If shares in a so called ‘real-estate’ company are transferred, the possibility of transfer tax may occur. c)

Own shares

61 The company may not subscribe for its own shares (section 95/205). In this respect there is a difference between the subscription on shares at the incorporation or at a later issuance and the acquisition of the shares by means of purchase. If the NV subscribes on 576

Duco Ottevangers

4. The NV Share/ BV Share

Netherlands

62

shares in breach of the prohibition of subscribing on shares, the shares for which the company subscribes shall be transmitted on the date of the subscription to the directors jointly. Each director shall be jointly and severally liable for the payment in full of such shares (section 95 subsection 2). A company may only acquire shares in its own capital if these shares are fully paid up. The acquisition by a company limited by shares if shares in its capital which are not fully paid up shall be null and void (section 98/207). In the day-to-day practice a company shall only acquire fully paid up shares. A company 62 may only acquire fully paid up shares in its own capital for no consideration or if: a) its shareholders’ equity reduced by the consideration is not less than the sum of the paid and called up part of its capital and the reserves which must be maintained by law or by the articles; and b) the nominal amount of the shares in its capital which the company acquires, holds, holds as pledge or which are held by a subsidiary company, is not more than ten percent of the issued capital. (section 98/207, subsection 2) In section 98/207, subsection 3, the financial position and limitations are further explained. For the calculation of the financial position the amount of the shareholders’ equity according to the last adopted balance sheet shall be determined, reduced by the acquisition price of the shares in the capital of the company and the distributions to others from profits or reserves becoming due by it and its subsidiaries after the balance sheet date. If more than six months have elapsed since the end of the financial year of the company, and the balance sheet, or the annual accounts have not been adopted and/or approved, an acquisition of own shares by the company is not allowed. An acquisition of shares in its own capital other than for no consideration, must be permitted under the articles and the general meeting of shareholders must have authorised the management to make such an acquisition. In the authorisation the number of shares, the manner of acquisition and the price-limitations must be determined. If the company acquires registered shares in breach of the prescriptions as set out above, the acquisition shall be null and void. The directors shall be liable (jointly and severally) if a transferor sustains any loss as a result hereof. The company may hold the formally acquired shares for itself, in order sale and transfer them in a later stage. On the shares the company holds in its own capital no votes may be cast. The company also has the ability to withdraw the shares. d)

Withdrawal of shares

Increase of capital can be realised in two manners: – withdrawal of shares; or – increase of the nominal value of the shares. Duco Ottevangers

63

577

64

Netherlands

II. Public Company Limited by Shares

The general meeting may decide to withdraw shares with regard to: 1. shares the company keeps in its own capital; 2. all shares of one sort; 3. drawn shares of one sort (of which is determined in the articles that they may be drawn, considered that the nominal value is repaid). The general meeting resolves to reduce the issued capital by a cancellation of shares (meaning the withdrawal of shares) or by the reduction of the nominal amount of the shares by amendment of the articles.

5.

Articles of Association

a)

Mandatory content

64 As mentioned in paragraph 2.a) the deed of incorporation of the company must embody the articles of this company. The articles must contain the name, the corporate seat and the objects of the company (section 66/177). The articles shall also mention the amount of authorised capital and the number and nominal value of the shares. If different classes of shares are created, the articles shall mention the number and the nominal value of shares in each class. The deed of incorporation shall also mention, for every person who subscribes for shares on incorporation, the particulars as mentioned in section 86/196 subsection 2 (the name, surnames, date and place of birth, place of residence and address of a natural person who is party to the deed of incorporation and/or the legal type, name, place of residence and address of the legal entities who are party to the deed of incorporation). The articles of the NV provide furthermore, whether the shares are registered or in bearer form (section 82). The articles must contain provisions with regard to the manner in which the company is represented if there are (temporarily) no managing directors in office or if they are prevented from acting (section 134/244, subsection 4). 65 Next to the mandatory content of the articles of association, the articles of incorporation also describe the legal acts as mentioned in section 94/204, being 1. legal acts pertaining to the subscription of shares containing special obligations for the company; 2. legal acts with regard to the acquisition of shares other than that on which a participation in the company is offered to the public; 3. legal acts in order to assure an advantage to an incorporator or a involved third party with the incorporation; 4. legal acts with regard to a non cash contribution, for example the contribution agreement

578

Duco Ottevangers

5. Articles of Association

Netherlands

66

These acts must be mentioned in full in the deed of incorporation or otherwise in a document, in original or in certified copy which is attached to the deed of incorporation, and of which attachment reference is made in the deed. According to section 132/242 the first directors shall be appointed in the deed of incorporation. The articles may restrict the circle of eligible persons by implementing in the articles the requirements which the managing directors must meet. b)

Amendment of the articles of association

aa) General procedure

In general, the management board decides to amend the articles of association of the 66 company. The proposal is normally prepared in consultation with a civil law notary. The proposal is submitted to the supervisory board (if there is any) and upon receipt of the approval of the supervisory board submitted to the general meeting. The general meeting has the power to amend the articles. If the articles exclude the right to amend the articles, the articles may nevertheless be amended by a unanimous resolution at a general meeting (section 121/231). The articles may limit the authorisation to amend the articles. These limitations are often seen with stock-listed companies, in a matter that only priority shareholders or the management board may propose to amend the articles. The resolution of the general meeting does not result in the amendment of the articles. The actual amendment requires a notarial deed (in the Dutch language) as well as a declaration of no objections by the Dutch Ministry of Justice. However a declaration is not obligatory if the amendment only consists of an amendment of the capital from Dutch guilders to euros as mentioned in section 67a/178a of the Civil Code (section 125/235 subsection 4). The declaration of no objections may only be refused if the company as a result of the amendment would be of a prohibited nature or if there is a possibility that the company will be used for illegal purposes after the amendment. bb) Shareholders resolution

If a proposal to amend the articles is to be submitted to the general meeting, this must 67 always be stated in the notice convening the general meeting (section 123/233). The persons giving such notice (mostly the board of directors of the company) must at the same time deposit a copy of the proposal at the offices of the company, containing the literally text of the proposal. Each shareholder has the right to inspect the proposal, until the end of the general meeting in which the resolution will be taken. No resolution to amend the articles may be taken if this is not convened, unless the resolution is passed unanimously in a meeting at which the entire issued capital is represented.

Duco Ottevangers

579

68

Netherlands

II. Public Company Limited by Shares

The shareholders must be given the opportunity to obtain a copy of the proposal before the general meeting in which the resolution will be taken. The same applies to holders of depository receipts. The articles of association may provide that resolutions of shareholders may be taken otherwise than in a general meeting of shareholders. This is only possible if no bearer shares have been issued and if there are no holders of depository receipts. If the articles contain such provisions, resolutions can only be taken in writing and unanimously (section 128/238). During bankruptcy or involuntary liquidation of the company an amendment of the articles can only be made with the consent of the liquidator (section 127/237). cc)

Notarisation

68 An amendment of the articles shall be null and void if the amendment is not made by notarial deed, which must be executed in the Dutch language (section 124/234). The deed of amendment of the articles of association may also be a notarial record of the proceedings of a general meeting in which the proposal for the amendment was resolved, or a notarial deed recording the proceedings executed afterwards. The board of management directors has the authority to have the deed executed, even if the general meeting has not authorised the management board to do so. The general meeting may also give other persons power of attorney to execute the deed of amendment of the articles. If the authorised capital is amended, the deed shall state which part thereof has been issued. dd) Deposition with the Trade Register

69 The directors shall deposit an officially certified copy of the amendment and the amended articles as weel as the new integral text of the articles at the trade register of the Chamber of Commerce. The Trade Register mentions the last date of amendment of the articles of association of the company on the extract. c)

Capital increase/decrease

aa)

Capital increase

70 A company may decide to increase its capital. Most of the times a decision for a capital increase is made in order to obtain new equity capital. Sometimes a company (or better: the shareholders of the company) may decide to increase the capital in order to influence the control structure of the company. A capital increase is mostly effectuated by the issuance of new shares. The board of managing directors or the supervisory board resolves to issue shares in order to obtain new capital. The company may, after incorporation, only issue shares pursuant to a resolution of the general meeting of shareholders (section 96/206). At the issuance of shares, shareholders shall have a pre-emptive right on the issued shares in proportion to 580

Duco Ottevangers

5. Articles of Association

Netherlands

71

the number of shares already owned by the shareholder. With regard to the contribution on the shares at the issue, reference is made to paragraph 2.a). Next to the possibility of the issuance of shares the shareholders of the company may decide to increase the capital of the company by means of an additional cash- or noncash contribution on the shares without issuance (share-premium). If the share is subscribed at a higher amount at the issuance, payment must be made for the nominal amount plus the higher amount. bb) Capital decrease

Capital decrease can be effectuated in two manners: withdrawal of the shares or de- 71 crease of the nominal value of the shares. Section 99/208 mentions both manners. A shareholders resolution is always required. In the resolution the shares referred to must be designated and provisions for the implementation of the resolution must be made. Concerning the NV for a resolution to reduce the capital, a majority of at least twothird of the votes cast shall be required if less than half of the capital is represented at the meeting. With regard to the BV this does not apply. A resolution to withdraw shares may only concern shares the company keeps in its own capital, all shares of one sort or drawn shares of one sort (of which is determined in the articles that they may be drawn, considered that the nominal value is repaid). A resolution to decrease of the nominal amount of the shares, by means of amendment of the articles of association of the company, must be made in proportion to all the shares of the same class. Partial repayment or a resolution to release a shareholder from the obligation to pay up for shares is only possible together with the resolution to reduce the nominal amount of the shares. The obligation to repay the reduced nominal amount on the shares only consists after all formalities have been met. A resolution to repay does not create a debt in the company. Creditors may not suffer any loss from the decrease of the freely-profitable reserves of the company or the equity-capital of the company as a result from the resolution to reduce the capital. Therefore the company deposits the resolution at the Trade Register, and shall publish a notice of this deposition in a daily, national, newspaper. The company must provide security for, or otherwise guarantee, the satisfaction of the claim of any creditor who demands the same. This is not applicable if the company capital or the financial conditions of the company provides sufficient security that the claim will be satisfied. Within two months after the publication (of the deposition of the resolution to decrease the capital with the Trade Register) any creditor may oppose to this resolution with the court, which opposition must contain the security desired from the company. Before the court makes a decision, it must give the company the opportunity to provide the desired security.

Duco Ottevangers

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72

Netherlands

II. Public Company Limited by Shares

A resolution to decrease the capital will not take any effect as long as the two-month term is still running and any opposition may be done by creditors. After two months the company obtains a so called ‘declaration of no opposition’ with the court. Upon receipt of this declaration the capital may be decreased. Any deed of amendment of the articles of association required for the decrease may not be executed prior to this declaration.

6.

Board of directors

a)

Directors

aa)

Function/appointment

72 Each director shall be responsible to the company (legal person) for the proper performance of the duties assigned to him (general provision of section 9). The management of the company is first of all the task of the management board together. In this matter they have a collective, collegial responsibility for the performance of their management task. The articles may provide that that the management must conduct itself in accordance with the directions of a corporate body. In general this is the fact when the company also has a supervisory board. The first of managing directors shall be appointed in the deed of incorporation (section 132/242). Thereafter managing directors are appointed by the general meeting, unless the appointment is made by the supervisory board. This may be vested in the articles, but may also be obligatory if the company is a so called “large company” or statutory two-tier company (according to section 162/272) the articles may restrict the circle of persons who may be appointed as a managing director by implementing requirements which people must meet in order to be appointed. These requirements may however not lead to a situation where it becomes difficult to appoint directors. The articles may provide that an appointment by the general meeting shall be made from a list of candidates. This is one of the oligarchic clauses Dutch company law contains (see further paragraph 3.b)). Management directors are generally appointed for an unlimited period. Despite their appointment by the general meeting, further arrangements are often made together with the supervisory board. The relation between the managing director and the company is mostly one retaining under employment law and at the same time one retaining under company law. 73 Managing directors may at any time be suspended and discharged by the corporate body empowered to appoint him (mainly the general meeting or supervisory board – section 134/244 –). The articles may provide that such a decision only can be made with a supermajority. This supermajority may not exceed two-third of the votes in a general meeting (section 134/244, subsection 2). The supervisory board is also authorised to 582

Duco Ottevangers

6. Board of directors

Netherlands

74

suspend directors unless the articles provide otherwise. Such a suspension may be terminated by the general meeting at any time. The suspension or discharge of a director must be registered with the Trade Register. The articles must contain provisions in respect of the manner in which the company is temporarily managed or represented if there are no directors in office or if they are prevented from acting. If the management board consists of multiple directors the solution is easy: the other directors will represent. If there is only one director the articles must contain provisions appointing one or more supervisory directors, or, if there is no supervisory board, giving authorisation to the general meeting to appoint a substitute. If however the temporarily representation is done by a supervisory director one has to act very careful. In this matter it can occur that the representing authority is one and the same person as the supervising authority. In this matter it may be advisable that the substitute does attend meetings of the supervisory board, but withholds himself from voting in such a meeting. bb) Minimum number

The management board consists of one or more directors. The exact number is deter- 74 mined in the articles or by the general meeting. Not only natural persons may be appointed as managing director of the company, but also legal entities. In this matter (and more specific in case of liability) section 11 determines that the liability of any legal person which, at the time the liability arose, was a director of another corporate body, is also vested in its directors, together with the corporate body. cc)

Other representatives

The articles of association may provide that the board of managing directors is author- 75 ised to vest the representative authority in other person than directors (section 130/240, subsection 4). In this matter, the board has the authority to appoint proxy-holders. These proxy holders may have full- or limited power of attorney. In case of a supervisory board the supervisory board often has to authorise the appointment of proxy-holders by the management board. The appointment of proxy-holders and the range of their proxy can be registered with the Trade Register. In this matter section 18 of the Commercial Registers Decree is applicable: as long as the proxy-holder and the extent of the proxy is not registered the limitation of the proxy may not be invoked to third parties, The articles of association may contain a short regulation concerning proxy-holders, but in some cases, extended regulations with regard to the appointment and authorisation of proxy-holders may be seen.

Duco Ottevangers

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76

Netherlands

b)

Management and representation

II. Public Company Limited by Shares

76 Subject to any restrictions in the articles of association, the management board shall be charged with the management of the company. Any powers not vested in the management board of the company shall be vested in the general meeting of shareholders, within the limits set by the law and the articles. The articles may provide that more than one vote is given to a director specified by name or office. One director may cast not more votes than other directors jointly. In most cases this is the fact when there is a chairman of the management board (mostly in family companies). The management represents the company insofar this is authorised within the limits of the law and the articles. The representation authority shall also be vested in each director, but the articles may provide that vest only in one or more managing directors within the management board (in this case the directors often are entitled in their function). In addition, the articles may also determine that the authorisation to represent the company may also be vested in two ore more directors, acting jointly, or the articles may provide that a director may represent the company only in co-operation with one ore more other persons (for example together with a proxy-holder). The authorisation to represent vested in the board of managing directors shall be unrestricted and unconditional within the limits of the law. Any restrictions prescribed by the law may only be invoked by the company (section 130/240). Only statutory restrictions which are deposited with the Trade Register have external effect. If the board of managing directors consists of more than one director, the board acts as a full board. Decisions of the board are usually taken with a majority of votes. The articles may contain provisions about the decision making process in the board of managing directors. If not the regulation of the majority of votes is applicable. In some cases the final-decision of the chairman as decision making instrument is allowed, but only if there are more than two directors. Otherwise the director not being chairman would be of no function at all. The board may also decide to deposit the regulations about the decision making process in separate regulations. Apart from the decision making process these regulations may also contain the assignment of tasks in the management board. The assignment of tasks only applies internally. It concerns the internal relation between the managing directors mutually and their relation towards the company. In case of excess of powers which only have internal effect, the company is bound. The director may be liable for failure in the performance / breach of contract by the company. In severe cases this may even lead to discharge. If a third party knew the director was exceeding his power this may lead to wrongful act from this third party towards the company. Any restriction in or conditions on the representative authority permitted or prescribed by law or in the articles may only be invoked by the company. The company also has the authority to ratify these acts if not prohibited by law. 584

Duco Ottevangers

7. Supervisory Board

c)

Netherlands

77

Conflict of interest

Unless the articles provide otherwise, the company shall be represented by the super- 77 visory board in case of a conflict of interest between the company and one or more of its directors. The general meeting shall always have the power to appoint a representative in case of a conflict of interest (section 146/256). Next to the conflict of interest between the director in private and the company, it may also occur that there is a qualitative conflict of interest, meaning that the director is representing to different companies being both party to an agreement with each other (or if the director is shareholder in the other company). The articles may leave the regulation with regard to conflict of interest undefined, but they may also provide in an alternative regulation in case of conflict of interest or appoint another director or an organ authorised to appoint a representative. In case the company has been represented in a matter concerning a conflict of interest, the company may, within a reasonable term, keep the other party to the contract (as defined by the Dutch Supreme Court).

7.

Supervisory Board

In the former paragraph the supervisory board and the position thereof have already 78 been discussed. Concerning the normal company it is up to the articles whether there is a supervisory board. In the large company the supervisory board is mandatory. a)

Appointment of members of the supervisory board

The first members of the supervisory board are nominated and appointed in the deed of 79 incorporation of the company. Contrary to the appointment of the first members of the management board, the appointment of the members of the supervisory board directly upon incorporation is not mandatory. Members of the supervisory board who are not already nominated in the deed of incorporation shall be appointed by the general meeting of shareholders (section 142/252), this unless the supervisory board is appointed in respect of section 158/268, with regard to the ‘large company’. One of the particulars Dutch company law provides is the possibility to implement in the articles that one/third of the supervisory board members may be appointed otherwise than by the general meeting. In this respect there is a possibility for the government, banks, bond holders and other interested parties (like employees) to have influence on the supervisory board. Like the appointment of board members, the general meeting is free to appoint any person as supervisory board member. The articles may however contain quality requirements for the appointment of supervisory board members. Legal persons may not be appointed as supervisory board members. There is no age limit for supervisory board members. Duco Ottevangers

585

80

Netherlands

b)

Function/duties

II. Public Company Limited by Shares

80 The duties of the supervisory board shall be the supervision of the policy of the management board and the general course of affairs of the. It shall assist the management board with advise. In the performance of their duties the members of the supervisory board shall be guided by the interest of the company and the enterprise connected therewith (section 140/250, subsection 2). The primary task of the supervisory board is the supervision of the management. The articles may however provide supplementary tasks and provisions regarding the duties and the powers of the supervisory board and its members. For example the ability to appoint, suspend or discharge managing directors or the ability to resolve to issue shares. Next to the supervisory duty the supervisory board has an advisory duty. These advises are of more importance than the advise the management board receives from independent third parties. The supervisory board carries co-responsibility for the general policy of the company, and in this respect the influence is more complementary. In some cases the articles of association may contain the provision that some resolutions of the management board need prior approval of the supervisory board. These resolution need to be written down in the articles or in a shareholders resolution. Evidently this does not discharge the management board from its responsibility for the board resolution. c)

Composition

81 The supervisory board consists of one ore more natural persons. If the supervisory board consists of more than one person it operates as a college. In this respect resolutions in the supervisory board are made with a normal majority of votes. It is however possible to create different provisions in respect hereto. These may be laid down in the articles or in regulations with regard to the supervisory board. The articles may provide that a supervisory board member designated by name or office is given more than one vote. One supervisory board member may not cast more votes than the other supervisory board members jointly. The articles may provide in the possibility of a delegated supervisory board member. This is a function more ore less created in the general corporate practice. The tasks of this supervisory board member are determined in the articles; however there is no basis for this function in the law. 82 In some cases man can also find an Advisory Committee. These committees may not cause any confusion with the supervisory board. It is not allowed to provide persons, who have in fact supervisory board authorisations, with another title. If the authorisations are specific supervisory board-like, the persons concerning must have the title of supervisory board member (Departmental Regulation).

586

Duco Ottevangers

8. Selected capitalization and liability questions

Netherlands

83

The supervisory board appoints a chairman out of its members. This has no legal basis, but most of the time the articles of association provide herein. The task of the chairman is however quite special, with regard to the day-to-day contact with the management. In practise the management tends to contact the chairman of the supervisory board first in case of problems or difficult issues. The chairman also presides the meetings of the supervisory board and mostly also the general meeting of shareholders. d)

Powers

Most of the articles containing provisions for a supervisory board also contain provisions 83 of board resolutions needing prior approval of the supervisory board. In order to determine the powers of the supervisory board it is advisable to check the articles of the company completely. For large companies, the Dutch Civil Code has created a list of board resolutions which shall be subject to the approval of the supervisory board. This list is mandatory (see further paragraph 13). Most of the subjects in the list as mentioned here above can also be found in the articles of smaller companies. Next to this also more important board resolutions (like the acquisition of real estate, mortgages, appointment of proxy-holders, entering loan agreements, etc). In this respect this may not lead to a conclusion that the management board is released from any other obligation to consult the supervisory board with regard to more important decisions not subject to prior approval. The powers of the supervisory may be extended in a way when the supervisory board members are also shareholders of priority shares, or board members of (for example) a foundation-priority-shareholder. De powers granted to priority shareholders become are becoming the powers of the supervisory board indirectly.

8.

Selected capitalization and liability questions

a)

Personal liability for shareholders /directors

The directors shall be jointly and severally liable, together with the company, for each 84 legal act binding on the company and performed during their management, until (section 69/180): 1. the filing of the initial registration of the company at the Trade Register, accompanied by the documents required to be deposited; 2. the paid up part of the capital amounts to at least the minimum capital prescribed on incorporation; 3. at least one-quarter of the nominal value of the capital issued on incorporation is paid-up.

Duco Ottevangers

587

85

Netherlands

II. Public Company Limited by Shares

The liability is limited to obligations following from legal acts. Obligations following from the law (for example the obligations for taxes or social insurance contributions) are not included in the liability. In section 9 the general liability for directors is described, containing a liability for the directors towards the company for the proper performance of the duties assigned to the director. If a matter falls within the scope of responsibility of two or more directors, each shall be jointly and severally liable for any shortcoming, unless this shortcoming can not be attributed to this director and that the director proves that he was not negligent in acting to prevent the consequences. Furthermore a liability for directors may occur for the payment of taxes or social insurance contributions, if the non-payment of these taxes can be attributed to the directors by means of improper management. b)

Discharge

85 Discharge means the release from liabilities by the general meeting for the (legal) acts performed by the management board. The law does not provide herein. Many articles contain provisions with regard to the discharge of the managing directors. In the annual general meeting of shareholders (mostly the meeting in which the annual accounts are determined and approved) one of the issues on the agenda may be the discharge of managing directors. c)

Forbidden distributions to shareholders and consequences

86 In case of distributions of profits there is also a fundament for keeping the initial capital of the company intact. The company can only make distributions to shareholders and other persons entitled to distributable profits only to the extent that the net assets of the company exceed the sum of the paid and called up of the capital and the reserves which must be maintained under the law or under the articles of association (the so called non-distributable reserves). An example of a non-distributable reserve is the revaluation reserve, which the company has to implement in the accounts after the (higher) revaluation of an active post on the balance sheet of the company. Any distribution of profits shall be made after the adoption or approval of the annual accounts in which appears that such a distribution is possible. Should the company make such a distribution contrary to this possibility, the distribution shall need to be repaid by the shareholder, in case this shareholder knew that such a distribution was not permitted. A company may make interim distributions only if the articles so permit and the requirements of the net assets as mentioned here above has been met as evidenced by an interim statement of assets and liabilities. 588

Duco Ottevangers

8. Selected capitalization and liability questions

Netherlands

87

The resolution and the interim statement shall be signed by all directors of the company, and, if one or more of the signatures is missing, this shall be stated, together with the reason therefore. The company has the obligation to deposit the interim statement with the Trade Register within eight days after the day on which the resolution to make an interim distribution is published. d)

Shareholders’ loans

In the day to day practise of the company it is often seen that the shareholders has a 87 current-account relationship with the company. This is allowed, however, the shareholder will always be liable for this debt to the company. Mostly the current-account relation consists of the amount of the initial capital the shareholder has to pay up on the shares, which the shareholder has withdrawn from the company immediately after having paid-up this initial capital. If a third party, in its own name, acquires shares in the capital of the company, or depository receipts issued therefore, for the account of the company, it must immediately transfer the same to the company against payment (section 98b). If this results in exceeding the limit of ten percent as mentioned in paragraph 4.c) the shares will be held for the account of the managing directors personally. For the BV it is determined that if a third party, in its own name, acquires shares in the capital of the company, or depository receipts issued therefore, for the account of the company, he shall be deemed to subscribe for or to acquire the same for his own account (section 207b). A company may not grant loans, provide collateral, guarantee the price, otherwise act as surety or otherwise bind itself jointly and severally with or for third parties, in order to achieve a subscription on shares in its own capital or the acquisition thereof by third parties. This applies also on the subsidiaries of the company (section 98c /207c). The granting of loans is allowed for NV shares if the shares in the NV are acquired or subscribed for by employees of the company or a group company. e)

Loss notification

In case the management board of the company discovers that there has been a sub- 88 stantial loss, the general meeting of shareholders needs to be informed. For the NV it is determined that within three months after the management board has considered it plausible that the shareholders’ equity of the company has decreased to an amount equal or less than half of the paid and called up capital of the company, a general meeting of shareholders shall be held to discuss the position of the company and the measures which will be taken, if necessary (section 108a). This seems a plausible solution, but in fact (especially with larger companies), if a company runs this risk and the equity has already decreased to such a low level, a general meeting to discuss the necessary matters to be taken will be of no use. Duco Ottevangers

589

89

Netherlands

f)

Affiliated enterprises

II. Public Company Limited by Shares

89 Acting as ultimate mother-company in a group of companies is not without any risks. In this respect the mother company runs the risks of liability towards group companies as well as itself. This liability may result from wrongful act as well as from the managingdirectors-liability. With regard to the liability for managing directors, the range of liability extends towards subsidiaries as well. Any person (or company) who has determined, or jointly determined, the policy of the business of the company as if he were a director, shall be treated as a director. The liability for the mother-company, on a basis of wrongful act may result from several cases. These are not restricted by law, but have more or less resulted from legal precedents. These result, for example in a liability for the protection of creditors of subsidiaries or omitting any interruption in case of financial needs, keeping up appearances of being creditworthy. In this respect it goes without reason that the subsidiary always has the duty to inform its mother-company in order to make it possible for the mothercompany to perform its duties properly.

9.

Accounting

90 The annual accounts are of any importance for the company. Not only do they provide the balance sheet and the profit and loss account with the notes thereon, it is also a financial explanation by the management board for a certain period (financial year) offering also a short overview of the financial situation of the company. Next to the annual accounts, Dutch Law also mentions the consolidated annual accounts, containing the annual accounts, profit and loss account, assets and liabilities of all companies in a group or group-structure and is considered as a whole. Furthermore we also see the annual reports, being a report which is not a part of the annual accounts, but forms, next to the annual accounts a short overview of the financial situation of the company, together with the expected affairs of the company (investments, financings, employees). a)

Annual accounts

aa)

Contents

91 The annual accounts, prepared in accordance with generally acceptable accounting principles, shall provide such a view as enables a sound judgment to be formed on the assets and liabilities and results of the company and, insofar as the nature of the annual accounts permit, of its solvency and liquidity (section 362). Until 1971 there was no legal basis with regard to the annual accounts. The youngest regulation with regard to annual accounts dates from 1988.

590

Duco Ottevangers

9. Accounting

Netherlands

92

Dutch Law provides in three subjects relating to annual accounts 1. the contents of the annual accounts, 2. the audit (by an accountant), 3. publishing. The management board of the company shall prepare the annual accounts, within five months after the end of the financial year, save where this period is extended by a maximum of six months by the general meeting (section 101/210). It goes without reason that the management board discusses the draft of the annual accounts with the supervisory board (if present) and the auditor /accountant. The annual accounts shall be signed by the directors and the members of the supervisory board. Dutch Law provides a detailed overview of the obligatory contents of the annual accounts. Next to the aforementioned provision that the annual accounts shall provide such a view as enables a sound judgment to be formed on the assets and liabilities and results of the company and, insofar as the nature of the annual accounts permit, of its solvency and liquidity, there are also provisions with regard to the balance sheet, the profit and loss account (and the notes thereon) and supplementing information. The balance sheet and the notes thereon shall fairly, clearly and systematically reflect 92 the net assets and composition of the assets and liabilities at the end of the financial year. The profit and loss account and the notes thereon shall reflect the result for the financial year and the items of income and expenses upon which it is based. Any income and expenditure over the financial year shall be included in the annual accounts. The annual accounts shall be adopted and submitted for approval, respecting all matters 93 with regard to the financial situation on the balance sheet between the date of preparation of the accounts and the adoption thereof in the general meeting. This means matters regarding the financial position of the company as per the date of the preparation of the balance sheet, but which have appeared afterwards. Chapter 3 of Title 9 Book 2 Dutch Civil Code provides detailed information with regard to the balance sheet and the notes thereon. In the balance sheet the assets shall be specified into fixed and current assets. Fixed assets are divided into tangible, intangible and financial fixed assets. Under the current assets, stocks, receivables, securities, liquid assets and prepayments are shown separately. The net assets, provisions, liabilities, and insofar as they are not included in the liabilities, accruals and deferred income, shall be shown separately under liabilities (section 364). In the following sections of the law the assets (intangible fixed assets, tangible assets, financial fixed assets, stocks included in the current assets, receivables included in current assets, securities and liquid assets) as well as the liabilities (net assets – showing: issued capital, share premium, revaluation reserves, other statutory reserves, reserves Duco Ottevangers

591

94

Netherlands

II. Public Company Limited by Shares

required by the articles, undistributed profits –, provisions, liabilities and other securities) are determined and specified by the obligatory contents. The same goes for the determination and specification of the contents of the profit and loss account of the company as well as the notes on the annual accounts and the profit and loss account. In choosing a principle for the valuation of an asset or liability and for the determination of a result, the company must follow the provisions of section 362. As principles may be considered the cost of acquisition, manufactured cost or the current value (with regard to tangible and financial fixed assets and stocks). The principles shall be applied in a prudent matter. b)

Audit requirements, adoption

94 The company shall give instructions for the audit of the annual accounts to a registered accountant or to an accountant administrative consultant. The instruction may also be given to an organisation in which qualified accountants work together (section 393). The general meeting of the company is empowered to give such instructions. If the general meeting does not resolve or does not give the instructions, the supervisory board or, if not present, the management board, shall be empowered to do so. The accountant shall examine whether the annual accounts provide the view required in section 362. Furthermore the accountant shall determine whether the accounts satisfy the requirements set by the law and whether the annual report has been prepared correctly and in accordance with the annual accounts. The accountant reports on his audit to the supervisory board or the management board, and mentions his findings in respect of the reliability and continuity of the data processing. The accountant presents the results of his examination in an auditors-statement. This statement is the first of the other information required to be assigned to the annual accounts. The auditors statement needs to be published together with the annual accounts (see hereafter). 95 The professional Rules and Rules of Conduct for Registered Accountants 1994 (and the same rules for accountants-administrative-consultants) provide amongst others regulations with regard to the auditor’s statement, resulting in four different kinds of statements. 1. the approving statement, containing the statement of the auditor that the responsibility meets the requirements. 2. the statement with restrictions, divided in the qualified auditors statement, containing certain uncertainties with respect to the examination and the auditors statement with exception containing objections against the explanatory notes. 592

Duco Ottevangers

9. Accounting

96

Netherlands

3. the statement containing a disclaimer of opinion, meaning that the auditor discovered uncertainties with regard to the examination which are as such that he will not be able to provide an approving statement. 4. the adverse audit opinion, containing the opinion of the accountant that the accounts do not meet the requirements provided. The statements sub 2, 3 and 4 need to be clearly motivated. If the statement is missing, the management board must explain the reason thereof. The annual accounts may not be adopted or approved if the constituent or corporate body empowered to do so, has been unable to take notice of the accountants’ report. The report should be appended to the annual accounts. The adoption of the annual accounts is done by the general meeting of shareholders unless this power is vested in the supervisory board of the company (section 101, subsection 3). The general meeting has the right to make amendments in the annual accounts; however this is almost never the case. In case of a large (two-tier) company, the adoption of the annual account is restricted to the supervisory board, after which the general meeting approves the annual accounts (see paragraph 13). c)

Publication

The publication of the annual accounts becomes effective by the deposition of the 96 accounts with the Trade Register. The deposited accounts need not to be signed, but the day of adoption or approval needs to be noted on the documents. Together with the annual accounts, the annual report and the other information is deposited. The Trade Register will keep the documents for a period of seven years. The regulation with regard to the time of deposition of the annual accounts is as follows (section 394): 1. The legal person shall publish its annual accounts within eight days after adoption. 2. If the annual accounts have not been adopted and approved in conformity with the legal provisions within two months from the end of the period set for their preparation (being in total a period of seven months), the management board shall publish the annual accounts as they are (in the stage of preparation) at that moment. It shall be stated that these accounts have not been adopted or approved. 3. Should the term of five months eventually be extended by the general meeting (with six months), and the accounts have not been adopted within two months after the end of the extended term, the management board has to deposit the annual accounts (not adopted) immediately. 4. Within thirteen months after the end of any financial year the legal person must publish its annual accounts.

Duco Ottevangers

593

97

Netherlands

II. Public Company Limited by Shares

The Ministry of Economic Affairs has the ability to grant, for important reasons, and on application, dispensation from the obligation to prepare, present and adopt the annual accounts. 97 For small sized companies there are also some legal exceptions with regard to obligations to publish (section 396), being: 1. the contents of the annual accounts: the balance sheet may be strongly simplified, the loss and profit accounts may be simplified; 2. the explanation may be shortened, in this matter that the amount of the net assets only need to mention the revaluation reserve; 3. the annual report does not need to be prepared; 4. the examination by an auditor is not necessary; 5. the deposition of the annual accounts: only the restricted balance sheet with the shortened explanation thereon must be published. 98 For medium sized companies the regime is as follows: 1. the contents of the annual accounts: no exception for the balance sheet, the profit and loss accounts needs to contain the same information as those of small companies; 2. the explanation needs no segmentation for the net-turnover 3. the annual report: no exception 4. the examination by an auditor: no exception 5. publishing: the annual accounts, the explanation and the annual report need to be published, but the published balance may contain shortened information. For the large company there are no exceptions provided. d)

Reserves

99 Reserves are created by withholding profits but may also be created in other manners. In this respect a distinction must be made between mandatory statutory reserves and reserves prescribed by the articles of association of the company. The best known example of a statutory reserve is the revaluation reserve, created when certain fixed assets are being valuated higher than in prior financial years. Section 390 prescribes that the balance sheet shall include a revaluation reserve equal to the difference between the book value before and after the revaluation. The revaluation reserve may be converted into capital (shares) and the revaluation reserve shall be deducted to the extent that the amounts reserved are no longer necessary for the achievement of the object of the revaluation. Another statutory reserve is the reserve for participating interest. This reserve must be created in a mother-company if a subsidiary, withholds profits. The reserve equals the share of the mother company in the withheld profit in the subsidiary. Statutory reserves must be mentioned in the balance sheet under the net assets. No distributions to shareholders may be done chargeable to the statutory reserves. 594

Duco Ottevangers

10. Termination of the business (dissolution /liquidation)

Netherlands

100

Next to the statutory reserves there are also reserves prescribed by the articles. These reserves are reserves kept for certain purposes. A many used reserve is the profit reserve. For the statutory reserves and the reserves prescribed by the articles the term legal reserve is also used. For reserves not created on a statutory basis or by the articles the term free or free-distributable reserves is used. Share premium may also be considered a free-distributable reserve. Hidden reserves occur when a company valuates certain assets in a legal way for a much lower value. For example the valuation against acquisition price, while the actual value is much higher. If the annual accounts meets the requirements of the transparency of the company, the actual value of the assets contained in these hidden reserves need to be mentioned in the annual report.

10. Termination of the business (dissolution /liquidation) The grounds for the dissolution (winding up) or liquidation of the company are (section 100 19): 1. by a resolution of the general meeting; 2. on the occurrence of an event which, according to the articles of association, results in winding up the company, which is not a resolution or a legal act resulting in a winding up; 3. after it has been put to bankruptcy, or upon termination of the bankruptcy because of the condition of its assets, or by its insolvency; 4. in case of an association, a cooperative or mutual insurance society, if there are no longer any members. 5. by an order of the Chamber of Commerce 6. by the Court in cases determined by law. The resolution of the general meeting occurs very often in practise. In many cases the articles of association of the company require a strengthened majority and a quorum for such a resolution. Once a resolution to wind up the company has been taken, it can not be withdrawn, and the company is dissolved. The dissolution on the occurrence of an event described in the articles is rather theoretic. It occurs not very often. Furthermore the dissolution may not be subject to a certain time or reaching a certain date. A legal person shall be formed for an indeterminate period (section 17). The company is not dissolved solely on the base of the bankruptcy. Dissolution only occurs on the termination of the bankruptcy because of the condition of the assets (being in practise that there are no assets) or dissolution because of insolvency. In case a company is declared bankrupt, the curator may collect unpaid capital on the shares with the shareholders. The company may also file for its own bankruptcy.

Duco Ottevangers

595

101

Netherlands

II. Public Company Limited by Shares

101 The dissolution of the company by the Chamber of Commerce only occurs on restricted occasions: the charges for the Chamber of Commerce have remained unpaid for more than one year, no managing directors have been registered with the Chamber for more than one year, the obligation to publish has not been met for more than one year or a demand to report to the tax authorities with regard to the Company-tax has not been followed for more than one year. This regulation intends the clearance of the commercial register and the prevention of abuse of shelf companies. 102 Dissolution by the Court may occur under certain circumstances. To start with this may be a default in the incorporation of the company. Next to this the Court has the ability to dissolve forbidden companies, companies of whom the articles do not meet the minimum-requirements as set out in the law, companies who act contrary to their objects or companies who are incorporated as a certain company but do not comply with the legal description of such a company. a)

Liquidation

103 If the legal person no longer has any assets at the time of its winding up, it shall cease to exist. In that case the management board shall file a notice thereof with the Trade Register of the Chamber of Commerce. This situation leads to a winding up without liquidation (the so-called turbo liquidation). Insofar as the court has not appointed any other liquidator and the articles of association do not designate other liquidators, the liquidation of the property, rights and interests and liabilities of the company will be done by the directors of the company which is wound up (section 23). After payment of the creditors, the liquidator shall transfer any surplus assets of the company subject to winding up to the parties entitled thereto in proportion of their respective rights under the articles or otherwise to the members or shareholders. The liquidator files the accounts rendered and the plan of distribution for entry at the Trade Register where the company is registered and at the offices of the company. The documents shall be available there for a period of two months. The liquidator publishes a notice of the deposition with the Trade Register in a newspaper, stating where and until which date the documents shall be available for inspection. Within two months after publishing any creditor or party so entitled may institute an action by an application to the court. After two months the liquidator obtains a so called declaration of no-resistance with the Court and the company may be deregistered from the Trade Register. The liquidation shall end when the liquidator is not aware of any further existing assets. 104 Reopening of the liquidation may occur when a creditor comes forward or the existence of an asset is ascertained. The court may, on application of any interested party, reopen the liquidation and appoint a liquidator. In that case the company revives, but only for the purpose of the settlement of the reopened liquidation. 596

Duco Ottevangers

11. Insolvency

Netherlands

105

11. Insolvency On the bankruptcy or involuntary liquidation of a company, each director shall be 105 jointly and severally liable to the estate for the amount of the liabilities to the extent that these cannot be satisfied out of the liquidation of the other assets. This only if the management has clearly performed its duties improperly and there is plausibility that this is an important cause of the bankruptcy or involuntary liquidation. This regulation is based on internal standard (manifestly improper management) but has external effects. The act belongs to the liquidator. The term manifestly improper management is of any importance in this respect. Required is that the management has had the ability to oversee the negative consequences at the time of adopting certain resolutions with regard to the company. However even this may not be enough if the resolution happens incidentally and not on a regular basis. According to section 10, the management board has the obligation for the proper administration of the books and records of the company, in such manner that the company’s rights and obligations may be ascertained at any time. In case of insolvency or even bankruptcy, not only the articles as mentioned in Corporate Law apply on the company. In that case the Bankruptcy Act also applies, containing amongst others articles with regard to fraudulent preference in case of bankruptcy and the liability of managing directors in this respect. Dutch Case Law furthermore provides in regulations for the management board in case 106 of overindebtness of the company. Should the management board know that the company is unable to meet its financial requirements upon a legal act, such a legal act is not allowed. In this matter it is also not allowed for a company to do formally legal distributions, while these distributions may lead to a wrongful act towards the company or its creditors in case of insolvency. The Dutch Supreme Court has resolved that any formally (and legally) correct legal acts towards or with regard to the company, may not lead to the discontinuity of the company, for which the management board is liable.

12. Choice of seat outside the Netherlands The changing of the seat may apply to the change of the statutory seat or its principle 107 place of business. The statutory seat is considered as the residence of the company, unless the office address is situated somewhere else. Changing the statutory seat is possible but requires an amendment of the articles of association. The statutory seat is relevant for the competence of the court in case of legal proceedings. Under normal circumstances it is not possible for a company to relocate its statutory seat outside the Netherlands (section 66: the corporate seat must be situated in the Netherlands). Duco Ottevangers

597

108

Netherlands

II. Public Company Limited by Shares

Relocation may be possible as temporary solution (for example in times of war), but only to another part of the kingdom. This regulation is stated in the Act concerning the Transfer by the Authorities of the Place of Establishment of Legal Persons 1967. Next to this there is also the Voluntary Transfer of Registered Offices Act 1994, providing the possibility to transfer the seat towards countries or states allowing immigration of registered seats. The relocation of an office address to a foreign country is possible. If the statutory seat of a company remains in the Netherlands the relocation of the company to its place of actual business to a foreign country is allowed. However, this may have tax consequences for the company. The registration of the company with the Trade Register is done in the register which applies to the statutory seat of the company. The extract mentions the office address in the other country as well.

13. Special provisions and simplifications for larger stock corporations (so-called “structuurvennootschap”) 108 For the larger companies (also two-tier companies) some special provisions and regulations have been laid down in the Dutch Civil Code. The criteria for large companies are provided in section 153/263: 1. the sum of the issued capital of the company and the reserves according to the balance sheet amounts the level of which the amount is set by Royal Decree (being nowadays a total sum of J 13,000,000). 2. the company or a dependent company has, pursuant to legal obligations, established a workers council; 3. the company and its dependent companies together normally employ more than one hundred employees in the Netherlands. These criteria are cumulative. Even a company with small net assets may apply to the criteria if the issued capital amounts to the minimum capital mentioned above. The company with this capital having suffered considerable losses may nevertheless be a large company according to the criteria. A dependent company shall mean a company to which a company limited by shares or one or more dependent companies, solely or jointly and for its or their own account, contribute at least one-half of the issued capital, or a partnership, a business undertaking of which has been registered in the commercial register and for which a company or a dependent company is fully liable as a partner towards third parties for all obligations. If the company meets the requirements of a large company it shall, within two months after adoption or approval of its annual accounts file a statement with the Trade Register. The essential difference between a large company and a smaller company is 598

Duco Ottevangers

13. Special provisions and simplifications for larger stock corporations

Netherlands

109

that the supervisory board is no longer optional but mandatory. Next to the composition and the manner of appointment of the supervisory board, the supervisory board has certain legal powers as mentioned in the law. The supervisory board members shall be appointed by the supervisory board (coopta- 109 tion), insofar the appointment has not already been made in the deed of incorporation or before the sections applicable on large companies were implemented. The power to appoint may not be restricted by any binding list and the articles may not restrict the circle of eligible persons for appointment (section 158/268, subsection 2). The supervisory board shall consist of at least three members. The position of supervisory board member may not be held by persons employed by the company, persons employed by a dependent company or officers and persons employed by an employees’ organisation involved with the (employees or employee benefits of the) company (section 160/270). The supervisory board shall notify the general meeting and the works council of the name of the person it wishes to appoint. The general meeting, the works council and the management board may recommend people for appointment; however the board appoints such person. The general meeting or the works council has the right to object to the intended appointment. Objects may be grounded on a base that the prescriptions concerning the procedure of the appointment not have been met, it is expected that the proposed person will be unsuitable for the performance of the duties of a supervisory board member or that the supervisory board will not be suitably composed. In practise not many cases have evolved in which this has lead to any jurisdiction (twelve cases are known). The articles may provide that one or more supervisory board members shall be appointed by a public authority. With regard to such an appointment the appointing authority shall have the same powers and obligations as those of the supervisory board (as mentioned above). The general meeting, the works council and the supervisory board have the possibility to recommend people for a membership of the supervisory board. A supervisory board member shall resign no later than four years after his last appointment as a supervisory board member. Removal of supervisory board members in a large company is only possible by the Enterprises Division of the Amsterdam Court of Appeal, upon application, in case of dereliction of duties or other important reasons. The authorities of the supervisory board contain the appointment and removal of management directors (section 162/272), the adoption of the annual accounts (section 163/273) and the approval of certain management resolutions (section 164/274) being: the issue and acquisition of shares of the company, cooperation in the issue of depository receipts, application for listing or withdrawal of listing on any exchange, entry into or terminating a lasting cooperation with another legal person, acquisition of participations by the company or a dependent company, investments requiring an amount equal to at least the sum of one-quarter of the issued capital, a proposal to amend the articles, a proposal to wind up the company, application for involuntary liquidation, termination of the employment of a considerable number of employees, a proposal to reduce the Duco Ottevangers

599

110

Netherlands

III. Limited Partnership – with a BV as general partner

issued capital and a far-reaching change in the working conditions of a considerable number of employees. Next to these the articles provide in other authorities of the supervisory board. At last the appointment and removal of management board members and the adoption of the annual accounts is not applicable if the Dutch large company constitutes a part of an international concern (section 155/265).

III. Limited Partnership – with a BV as general partner – (Commanditaire Vennootschap – CV –) 1.

Character of the CV

110 In general the operation of a business as partnership under a mutual name leads to a general partnership (“vennootschap onder firma”). In this case the liability applies to all partners jointly and severally, which may not be acceptable for all partners at all times. The CV (Commanditaire Vennootschap) provides the ability to participate in a partnership as partner under the condition that the liability is limited to the extent of the paidin capital in the partnership. Such a partner in this limited partnership is not authorised to perform legal acts on behalf of the CV and on the other hand he his only liable to the extent of the paid up capital (and not for further agreements on behalf of the CV towards third parties). The limited partner is (in the day-to-day business) also called ‘silent partner’. Silent because he may not, as provided in section 20 subsection 2 Commercial Code, perform any act of management. This means that it is not allowed for the silent partner to act on behalf, and explicitly for the account of, the CV. In case of such a legal act the suggestion may arise (with third parties) that they are dealing with an authorised (and fully liable) general partner (“beherend vennoot”). For the same reason the name of the silent partner may not appear as or in the Trade Name of the CV. In order to prevent any misunderstandings, the names of the silent partners are not registered with the Trade Register. Only the number of silent (limited) partner and the extent of the paid in capital (or the value of the assets contributed) is registered. 111 It may be obvious that the CV needs to have, next to the limited partners, one or more general (or managing) partners, in order to participate in the social and economic life as a company (or enterprise). One or more partners is basically authorised to represent the CV and thus jointly and severally liable. In this matter it may be advisable to appoint a private company as general partner of the CV in order to limit the liability of the general partner within the extent of the limitations for the BV as provided in the corporate law of Book 2 (see chapter III). In case an investment company is organised in the form of a CV, in general the CV with a private company as general partner is the 600

Duco Ottevangers

2. Formation

Netherlands

112

chosen form. Because of the fact that the choice for a CV depends merely on fiscal advantages it may be obvious that the liability will be limited as well. In this matter we can see that a lot of these investment-funds are organised as ‘CV-BV’. In the Netherlands not many businesses /enterprises are operated as a CV. In 1998 the 112 total number of CV’s was 8,000, compared to 140,000 general partnerships and 450,000 BV’s. This may be because of the fact that there is no thorough legal basis for the CV (there are no more than a few provisions with regard to the CV in the Dutch Civil Code). However, there may be occasions in which it may be advisable to choose for the CV as a business form. In fact, a lot of investment companies, in which it is possible for private persons to participate in the investment (capital) of the company and thus take advantage of the profits of the CV without being liable (apart from the paid-in capital), are driven in the form of a CV. Also the situation of the ‘family-business’ may be profitable in the form of a CV. In case the (older) general partner ‘withdraws’ himself from the family business, but wants to stay connected with the business without having any liability or managing authority, the CV may be the useful business form. The starting entrepreneur can also take any profit from starting his enterprise as a CV. Creating ‘silent’ capital without having the obligation for any direct interest payments or refunds may help the company with certain credibility in the day-to-day business.

2.

Formation

The partnership-contract has no basis in the law. Section 19 of the commercial Code 113 provides in a section with regard to the limited partnership, but does not provide in any regulation thereto. In general the limited partnership is agreed upon by notarial or private instrument. The partnership is a legal relationship with important legal characteristics, as well for the internal partners, as for the external third parties. Without any instrument the prove of the existence of the partnership cannot be invoked against any third party. It may be clear that it may be of any interest for a third party to prove that there is a partnership between the person or entity he dealt with and others. Not only with regard to the liability of the partnership, but also for the available means of recovery against the capital of the partnership. In case of the limited partnership a difference must be made between the internal and 114 the external authorities of the partners. It has already been said that the limited partner is not authorised to perform any legal acts on behalf of the company externally. This does not mean that the partner is automatically unauthorised to perform internal acts also. The limited partner may have any influence on the policy of the partnership. It is

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III. Limited Partnership – with a BV as general partner

in the further process, up to the general partners to perform legal acts externally, as discussed internally with the limited partners. The instrument (notarial or non-notarial) in which the limited partnership is agreed upon may contain several regulations with regard to the formation of the partnership. The agreement is not based on any formalities and may contain all agreements the partners wish to have recorded in the instrument. In general agreements are made upon the capital, the seat, the objects, the management, decision making, accession and retirement, continuation (in case of retirement, decease or any other failure of – one of – the partners), dissolution and liquidation. 115 In some partnerships the regulations with regard to the accession and retirement are more limited. A distinction can be made in this respect, between the so called ‘openpartnerships’ and the ‘non-open-partnerships’. A non-open-partnership means that the accession or retirement of the limited partners only is possible with the consent of all partners, general or limited. In this matter the partnership is fiscally transparent, which means that each individual partner will be taxed for his individual company share. The non-open-partnership is used very regularly in the Netherlands for investment-partnerships (especially for investments in real estate or – sea-vessels). If the partnership has an open character, there is no fiscal transparency and the partnership itself will be taxable for the company-tax, but only as far as the enterprise exploited by the partnership is for the account of the partners together. With regard to the non-open-partnerships in the sense of investment fund, additional regulations are provided in the Investment Institutions Supervision Act. If a non-openpartnership wishes to operate as an investment fund several declarations of no objections (by the Dutch National Bank and the Ministry of Justice) are obligatory. In some cases the partnerships even have the obligation to issue a prospectus before limited partners may tender for shares in the partnership.

3.

Partners/Partners’ meeting

116 In order to realise the objects of the partnership, the partners shall need to make agreements on several (management) issues. The matters on which the partners need to agree upon are regulated in the partnership – agreement. The basic principle is that all matters are decided upon unanimously (as with the general partnership), but in case of a larger limited partnership or a non-open-partnership (investment fund) the process of decision making, may be vested in the general partner. In case of the (smaller) open CV the partnership may have the need for the partners to meet more often. In fact, if the partnership is actually a small (family) enterprise the partners may meet each other every day in the regular practise of the business. Decision 602

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making is much easier in such cases than in case of a larger CV with a large number of limited partners. Apart from the basic principle that all matters are decided unanimously, the partnership agreement may provide in another assignment of the votes within the partnership meeting. The fact that matters need to be decided unanimously may prevent the partnership form its success. The legal basis for acts concerning the day-to-day business of the partnership is vested 117 in the regulations with regard to the partnership (maatschap), which apply also on the limited partnership. In this respect section 1676 book 7A provides in a regulation that all general partners have the ability to represent the partnership in its daily business. The partnership agreement however may provide that one of the partners has the exclusive authority to represent the partnership (the so called ‘gerant statutaire’ or statutory general partner). With regard to legal acts on behalf of the partnership, not concerning the day-to-day business, there is no legal basis. This means that, if the partnership agreement does not provide otherwise, all decisions with regard to representation of the partnership in this matter need to be taken unanimously in the partners’ meeting. In order to cope with the problems which may arise from this irregularity with regard to the difference between normal day-to-day business and other decisions, it may be advisable to regulate this thoroughly in the partnership agreement and to provide in rules on the settlement of disputes in the agreement. The purpose of a partnership is to gain advantage on a basis of contribution by the 118 partners. Contribution in the respect means the provision of the partners for the common purpose. This can be money but may also consist of labour, goodwill, knowhow, relations, intellectual property or assets. The obligation for contribution of the partners was withdrawn from the law in 1992. The basic principle remains the contribution of the partners, giving the partners the right to a share in the profits. The actual share in the profits and also the right to claim a share of the profits is essential for the partnership. It must be certain that the profits will be accumulated to each of the partners. And the profits have to be, above all, for the common partnership. Regulations, resulting in the accumulation of all profits to only one partner are null and void, however it is permitted to stipulate that all losses will be bared by one sole partner (section 1672 book 7A). An agreement resulting in the accumulation off all profits to one partner does not have to be totally null and void. The Dutch Supreme Court decided that such a regulation does not lead to a ‘partnership’. Furthermore the profits need to be determined by the joint partners in the partnership. The scope of amount of the profits for each partner may not be determined by just one of the partners or a third party. Provisions contrary to this stipulation are null and void Duco Ottevangers

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(section 1671, book 7A). The partners may however periodically decide (unanimously) which part each partner has in the profits of the partnership. Next to this it is possible that the partner who contributed labour, receives a guaranteed income payable by the partnership.

4.

Management

119 With regard to the management of the partnership a distinction must be made between the managing director who is (for example) employed by the partnership and the representation of the partnership by the general partners. In this respect the company-risks are vested with the joint partners, the general partner is more or less the managing director. But contrary to for example the BV, this ‘managing director’ is severally liable (since he is also partner in the partnership). In this matter the liability may be limited by the constitution of the private company with limited liability as a general partner. Internally the management is vested in the joint partners (see paragraph 3). It is up to the general partner to carry out this management externally. In the daily practise this may be a source of conflicts between the general partners and the silent partners. The interests of the silent partners are merely financial. Only the results on their contribution are valuable. For the general partners, who also act as the actual entrepreneurs, several other issues (also the non-financial) may be of any importance. It is therefore advisable to provide in stipulations with regard to the decision-making-process in the partnership agreement. In case the general partner acts contrary to internal appointments this may not be invoked towards third parties by the silent partners. This may be considered as an internal breach of contract. 120 The essential difference between the general partner and the silent partner lies within the difference in the external representation of the partnership. The silent partner is not liable against third parties for legal acts of the partnership and he is not allowed to perform external legal acts on behalf of the partnership. The silent partner needs to take this prohibition into account very thoroughly. Offence means liability for all legal acts of the company by the silent partner like if he were a general partner, not only against the creditor he dealt with, but against all other creditors as well, future and those already existing and those in bad faith. From an internal point of view, external representation by a silent partner may be considered breach of contract. The position of the silent partner towards the partnership however, does not change. He is still not allowed to perform any legal acts on behalf of the partnership. This does not only apply on representation, but also on using the name of the silent partner externally in combination with the name of the partnership. Nowadays there is still no solution for the silent partner how to lose the liability after having offended the regulation.

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5. Termination of the business /accession/retirement

5.

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Termination of the business /accession /retirement

At first the partnership is a legal relationship between the partners personally. One of 121 the consequences is that the partnership will be dissolved upon the retirement of one of the partners. Practically it may not always be useful to dissolve the partnership upon the retirement of one of the partners. In this respect the partnership agreement may provide in the continuance of the partnership upon retirement of one of the partners or upon the change of one of the partners by means of a continuance clause or a survivorship clause. There are not many legal provisions with regard to the abovementioned clauses, but the Dutch Supreme Court has explicitly acknowledged the possibility of the change of partners in combination with the continuance of the partnership. The intention to continue the partnership may be expressed implicitly or explicitly, but towards third parties it may not always be obvious. The continuance clause or the survivorship clause needs to be registered with the Trade Register or communicated towards third parties in order to have any result. The intention to continue the partnership may apply to several situations. With regard to the accession to the partnership the sitting partners may have the intention to proceed with the partnership together with the new partner. In case of retirement the partners may have the intention to proceed with the partnership together as successors or with the heirs of a deceased partner. In case of accession to the partnership it may not be obvious if the partnership was 122 dissolved and succeeded by a newly incorporated partnership or if the partnership has been continued by the new partners together. Third parties may assume the last, and the new partnership is liable for debt of the partnership as existed before the accession. This means newly accessed partners are also liable for debt of the partnership which already existed. This only if these new partners are general partners. New silent partners are only liable to the extent of their paid in capital and are not liable for debt of the partnership. With regard to the accession of new partners a consensus between the new partner and the existing partnership is needed. If not, the new partnership will not come into effect. With regard to the retirement of partners (and in case of succession) it is different. The retirement may be provided in the partnership agreement (dissociation) but may also be possible by means of one-sided termination or by means of dissolution by the court on the basis of important reasons. At last retirement can also exist in the basis of objective criteria like death, bankruptcy or guardianship. Only in case the retirement leads to the surviving of the partnership by one partner, arrangements need to be taken in order to assure the existence of the company. All partners together may resolve that one of them may retire from the partnership. Next to this the retirement may also be agreed upon in the partnership agreement. For example in case the partner does not meet the requirements for being a partner anymore (this may be reaching a certain age or losing certain qualities or authorities). Duco Ottevangers

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III. Limited Partnership – with a BV as general partner

The Supreme Court has also resolved that it is possible that the partners together terminate the partnership of one of them (a sort of expel) if the partners resolve that this is necessary for important reasons. As said the retirement of partners implies the dissolution of the partnership unless the other (surviving) partners wish to continue the partnership. The continuance of the partnership needs to be implemented in the partnership agreement. If not this may be resolved afterwards, but this can lead to irregularities towards third parties. According to section 1683 book 7A decease, guardianship or bankruptcy of one of the partners leads to dissolution of the partnership. One of the most common regulations is the continuance clause, providing in the continuance of the partnership in such event. A clause like the continuance clause has direct effect and the surviving partners will continue the partnership by operation of law. The agreement may also provide in an option for the partners to continue the partnership. Succession of a partner means the accession of a partner who is more ore less the replacement of a retiring partner. Regulations with regard to succession may be agreed upon in the partnership agreement or may be agreed upon later. These regulations may provide in succession in case of decease of partners but also in succession during life. These regulations may state that the new partner replaces the retiring partner in the same position, or in a new (different) position. In case succession with the common heirs is stipulated, these heirs replace the deceased partner together under universal title.

6.

Accounting

123 Given the fact that the partnership operates a business, it also has the obligation to keep proper records (section 15a book 3). This apart from the obligation from the general partner-BV to produce annual accounts (see chapter III) as a BV. The obligation to keep proper records is one of each individual partner and does not only concern the financial condition of the complete partnership but also of the individual partners. The organization of the records has no legal basis. Within six months after each financial year a balance sheet needs to be prepared. The balance sheet needs to be organized according to the standards of the partnership. All relevant documents need to be kept for ten years. Audit or publication is not required. The partners will prepare internal accounts for their own purpose. The organisation thereof requires no prescribed form. The standard will be the standards as agreed upon in the partnership agreement, the type of business, fiscal standards and eventual other legal prescriptions.

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According to section 11 of the Commercial Code, certain persons, amongst who the partners (general as well as silent) have the right to the presentation of the annual accounts, but only if they have a rightful interest.

IV. Branches of Foreign Companies/Other Business Forms 1.

Branches

In the Netherlands the Companies Formally Registered Abroad Act applies on bran- 124 ches of foreign entities. Not entirely though since the Court of Justice has decided that this act is partially nonbinding. The Dutch international private law is based in the incorporation-doctrine. This means that a legal entity is regulated according to the laws of the country of incorporation. Next to this there is always the actual seat (office address) of the company, resulting in the doctrine of the siege reel, where the laws of the country of the office address of the company apply. Foreign companies having a branch in the Netherlands are therefore at first regulated according to the laws of the country of incorporation, with as result that the Dutch laws don’t apply on these branches. To avoid abuse of eventual minimal formalities in foreign countries, the Companies Formally Registered Abroad Act was implemented in 1997, giving extra obligations to branches. This has resulted in formalities with regard to the registration of branches, being the registration in the Dutch Trade Register, the entry of the quality of the entity on their company stationery, the amount of the minimum-capital en the preparation and the composition of the annual accounts. According to jurisdiction by the Court of Justice, the Companies Formally Registered Abroad Act conflicts with sections 43 en 48 of the EU-Treatment, meaning the freedom of establishment for legal entities. The Court has decided that this only applies to EUentities. For legal entities incorporated outside the EU, the Act applies normally. The regulations with regard to the recording in the Trade Register of being a formal registered abroad entity, the recording of the first recording in the country of incorporation, the recording of the sole shareholder and the deposition of an auditors-statement with regard to the minimum-capital have been declared null and void. This means that a foreign EU-entity may establish itself rather freely in the Netherlands. Also the jurisdiction has resulted in the possibility of the incorporation of another (foreign) legal entity (for example a Ltd) in the Netherlands, offering several opportunities. For example in case of a Ltd, the incorporation can be done much faster, has less formalities and lesser costs (for example there is no requirement with regard to the minimum capital in case of a Ltd).

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Netherlands

2.

Formation/registration procedure

IV. Branches of Foreign Companies/Other Business Forms

125 The administrator of a branch of a foreign company has the authority (not the obligation) to register this branch with the Commercial Register of the Chamber of Commerce. The managing directors of the foreign company have this authorisation as well. In all cases a branch is registered, the administrator of this branch needs to be mentioned in the administration. To prove that a foreign entity is actually existing and registered abroad, an extract of the registration needs to be produced. This extract may not be older than two months. Should the foreign entity be a legal entity the Chamber of Commerce requires also a true copy of the deed (or instrument) of incorporation of this entity, the full articles of association of this entity and an extract proving the appointment of the management board and (if present) supervisory board. In some cases the Trade Register may require an apostille. Each year, the branch need to deposit the annual accounts with the Trade Register. These annual accounts may be organized according to the standards of annual accounts in the country of origin, and may be in the form in which the foreign entity publishes its annual accounts in the country of origin. The registration forms need to be filled in the Dutch language. English translations are available with the Chamber of Commerce. The documents as mentioned above need to be deposited in Dutch, French, English or German.

3.

Other business forms

126 In the social and economic life other business forms than the above discussed may appear as well in the Netherlands. The most common are the partnership and the general partnership next to the limited partnership, but also the commercial foundation the association and the co-operation may be found. With regard to partnership new legislation on partnerships is due, resulting in the being of a legal entity for these partnerships (the so called Wet Personenvennootschappen). 127 The foundation may be used as a foundation with commercial activities, meaning activities which result in the gaining of profits by the foundation. The commercial foundation is a foundation which exploits these activities on a regular basis. A foundation making profits incidentally may not be considered as such. The difference between a foundation and the BV and/or NV is that with regard to the incorporation of the foundation less government control applies, that there are no requirements with regard to minimum capital and that accounting and reporting rules do not apply (maybe in future they will). Furthermore the foundation has no right to hold an inquiry.

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The disadvantage however is that the foundation as well as the association is not allowed distributing profits to its members, managers or founders. In this respect it is not very advisable to undertake an enterprise in this legal form if the intention of the entrepreneur is making profits and distributing these profits to himself.

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Table of Contents I.

Survey

1. Forms of business organisations a) Summary of the different forms of business organisation aa) Joint stock company bb) Unlimited liability partnership cc) Unlimited liability partnership with divided personal liability dd) Limited partnership ee) Internal partnership ff) Silent partnership gg) Joint Ventures hh) Norwegian branches ii) Agents and distributors 2. Limited stock companies a) Introduction b) Commencement c) Main differences between the two corporate forms

614 614 614 614 614 614 615 615 615 615 615 615 615 615 616 616

II. Public and private limited

companies 1. a) b) 2. a)

Character of the limited companies Character of the ASA Character of the AS Formation Formation procedure aa) Minimum share capital requirements bb) Payment of share capital contributions cc) Non-cash share capital contributions dd) Formation expenses ee) Share premium reserve b) Registration procedure/ commercial register

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c) d) e) f) g) 3. a) b) c)

d) 4. a) b)

617 617 617 617 617 618 618 618 619 620 620

c) 5. a) b) c)

Approval requirements Shelf companies Cost, duration etc. Pre-incorporation status Company stationary The shareholders Rights and duties aa) Dividend Shareholders’ meeting Shareholders resolutions aa) Shareholder exclusion – redemption of shares at the shareholder’s and the company’s option bb) The shareholder’s right to demand that his or her shares be redeemed by the company Compulsory redemption of shareholder The shares Classes of shares Transfer of shares aa) Private limited companies (AS) (1) General (2) Shareholders register (3) Transfer restrictions in an AS (4) Access to the register of shareholders bb) Share transfers, etc. in an ASA (1) General (2) Shareholders register (3) Transfer restrictions in an ASA Own Shares The articles of incorporation Mandatory content Change of the articles of association Capital increase/decrease

621 621 621 621 622 622 622 622 623 625

627

627 628 629 629 629 629 629 630 630 632 632 632 632 634 635 637 637 637 637

620

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Norway

6. a) b) 7. 8. a) b) c) d) e) f) 9. a) b) 10. 11. a) b)

aa) Increase in the share capital by new subscription for shares bb) Increase in the share capital by bonus issue cc) Reduction in the share capital The board of directors and management Board of directors The general manager (“CEO”), management The corporate assembly Capitalisation and liability issues Company capital General requirements for the amount of the equity Duty of action in case of loss of equity Transactions between the company and the shareholders Granting of credit and furnishing of security (“financial assistance”) Liability Accounting Accounting Audit requirements Taxation Termination of the business The formal proceedings of liquidation Liquidation board

Index

637 638 639 640 640 642 642 643 643 643 644 645 646 647 647 647 648 649 649 649 650

c) Obligations of the directors / board members d) Obligations of the shareholders e) Taxation issues aa) Advanced tax assessment bb) Taxation of the Company cc) Taxation of the shareholders in the Company f) Duration of liquidation proceedings 12. Insolvency a) Introduction b) Summary of Norwegian insolvency proceedings c) Bankruptcy proceedings d) Debt reorganisation 13. Choice of seat outside Norway 14. Other important subjects a) Mergers and demergers aa) Scope of the rules on mergers bb) Approval of the merger plan cc) Contents of the merger plan dd) Other merger documents ee) Accounting ff) Notification to the Register of Business Enterprises gg) Scope of the rules on demergers hh) Tax consequences of mergers and demergers

650 650 650 650 651 651 651 651 651 651 652 653 653 653 653 653 654 654 654 655 655 655 656

Index Abuse of authority 47 Accessibility of register 55 Accounting 81, 109 Acquisition of shares 14 Advanced tax assessment 89 Agenda 40 Agents and distributors 10 Alteration of the articles of association 46, 61 Appointment 68, 72 Articles of incorporation – content 60 Audit requirements 83 Bankruptcy petition and cash deposit 95 Board of directors 65 Bonus issue 63

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Branches 9 Chairman of the general meeting 42 Choice of seat 105 Company capital 74 Company name 32 Compulsory “redemption” 50 Continuance of business 101 Corporate assembly 71 Debt reorganisation 104 Decision-making 45 Demergers 111 Distribution equity 37 Distribution of dividend 98 Divided personal hability 4

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Index Dividend 34 Duration of liquidation procedures 92 Duties 66, 73 Duties of management 70 Duty of action 77 Equity 36 Equity requirement 75 Evaluation of equity 76 Extraordinary general meeting 48 Financial assistance 79 Financial statements 82 Forced sale 100 Formation 17 Formation expenses 25 Formation procedure 18 Functions 69 Hability 22 Increase of capital 62 Insolvency 93 Insolvent 94 Internal partnership 6 Introduction 1 Joint stock companies 2 Joint venture 8 Liability 80, 96 Limited partnership 5 Liquidation board 86 Liquidation procedure 85 Liquidator 97 Management 67 Meeting attendance 39 Merger documents 108 Merger plan 107 Mergers and demergers 106 Minimum share capital requirement 19 Non-cash share capital contribution 23 Notices of meetings 41 Notification 110 Obligations of liquidations board 87 Obligations of the shareholders 88

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Norway Opening balance sheet 20 Own shares 59 Payment of share capital contribution 21 Pre-incorporation status 31 Priority of claims 103 Private limited companies 16 Profit 35 Promotors’ liability 24 Public limited companies 15 Public offering 12 Redemption of capital 64 Redemption of shares 49 Registration 27 Registration costs 30 Registration requirements 28 Seizure of assets 99 Share capital requirement 13 Share premium reserve 26 Share transfer 56 Shareholders 33 Shareholders register 53, 57 Shareholders resolution 44 Shareholders’ meeting 38 Shares 51 Shelf companies 29 Silent partnership 7 Statutory provisions 11 Taxation 84, 112 Taxation of the company 90 Taxation of the shareholders in the company 91 Transactions between the company and the shareholders 78 Transfer of shares 52 Transfer restrictions 54 Transfor restrictions 58 Unlimited liability 3 Voidable transactions 102 Voting 43

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I.

Norway

I. Survey

Survey

1 The corporate firms in Norway are dominated by the joint stock companies (limited liability companies); both the public limited companies and the private limited companies. Further, an increasing number of branches of foreign companies have flourished. Within professional services, and for certain investment projects, the unlimited liability company or the limited partnership may be seen from time to time. This article will primarily concentrate on the most usual corporate firms and rules pertaining to these in a number of respects. However, in order to gain insight into the various corporate firms, we will below set out brief details on all the corporate forms.

1.

Forms of business organisations

a)

Summary of the different forms of business organisation

aa)

Joint stock company

2 Joint stock (or limited liability) companies are characterised by the shareholders’ lack of personal liability for the company’s obligations. The shareholders are liable only for the share capital they invest in the company. Joint stock companies may be organised as private or public limited companies. Private limited companies are governed by Act No. 44 of 1997 relating to limited liability companies (the “ASL Act”), whereas public limited companies are governed by Act No. 45 of 1997 relating to public limited liability companies (the “ASAL Act”). Both Acts came into force on 1 January 1999. bb) Unlimited liability partnership

3 Unlimited liability partnerships are characterised by the partners’ personal liability for all the obligations of the partnership. The partners are jointly and severally liable for the total amount of the company’s obligations. Unlimited liability partnerships are governed by the Partnership Act. cc) Unlimited liability partnership with divided personal liability

4 The partners of an unlimited liability partnership may decide to divide the personal liability of the partners. Each partner will then be liable only for a portion of the obligations. However, the partners together must be liable for the total of the company’s obligations. The Partnership Act applies.

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dd) Limited partnership

Limited partnerships are required to have one “general” partner who shall have un- 5 limited personal liability for all of the company’s obligations, and at least one “special” (or “limited”) partner whose personal obligation is limited to a certain amount. Limited partnerships are also governed by the Partnership Act. ee)

Internal partnership

An internal partnership is an unlimited liability partnership, with or without divided 6 personal liability, not acting as such in relation to third parties. ff)

Silent partnership

A silent partnership is a limited partnership which does not act as such in relation to 7 third parties. gg) Joint Ventures

Under Norwegian law joint venture is an agreement to collaborate that does not fall 8 within the definition of or the statutory regulations relating to companies or partnerships. The agreement is usually in a looser form than a partnership. However, it is often difficult to determine whether the agreement constitutes a partnership or a joint venture. hh) Norwegian branches

A foreign company may conduct business activity through a Norwegian branch. A 9 branch is regarded as a part of the foreign company and the foreign company is liable for the obligations of the branch. ii)

Agents and distributors

A foreign company also has the option of conducting business activity through an agent 10 in Norway. The agent acts in the principal’s name and for the principal’s account.

2.

Limited stock companies

The main form is the limited stock companies, henceforth this will be dealt with below. a)

Introduction

New Norwegian Companies Acts were passed by the Norwegian Parliament in 1997: 11 – Act No. 44 1997 relating to private limited companies (AS), the Act hereafter referred to as ASL. – Act No. 45 1997 relating to public limited companies (ASA), the Act hereafter referred to as ASAL. Smaller companies are usually organised as private limited companies (AS), whereas large companies often choose to establish themselves as public limited companies Jo Rodin

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I. Survey

(ASA). Companies within certain sectors or with certain object must be organized as ASA’s, cf. below. The two Acts are to a large extent similar in structure and content, and have the same chapter division. When a reference is made in the following to a statutory provision, the statutory provision applies to both corporate forms unless it is indicated which of the Acts, either ASL or ASAL, it is referred to. In connection with their formation, the companies decide the corporate form under which they want to carry out their business activities. Companies wishing to conduct their business as an ASA must specify this in their articles of association. If an AS has been formed, chapter 15 of ASL regulates how it can be converted into an ASA. b)

Commencement

The Acts entered into force on 1 January 1999. On the same date, the new Accounting Act of 17 July 1998 also entered into force. Reference is made to chapter 11.a) in this presentation. c)

Main differences between the two corporate forms

12 The main difference between an AS and an ASA is that only an ASA may invite subscriptions from the general public for the purpose of obtaining new share capital. An AS may only make limited placings, i.e. issue shares to a specific group of investors. 13 Another important difference is the minimum share capital requirement. An AS must have a minimum share capital of NOK 100,000 (approx J 12,000), whereas an ASA must have a minimum share capital of NOK 1,000,000 (approx J 120,000). As a general rule, shares in an ASA are freely negotiable, but the articles of association may stipulate that the consent of the board of directors is required. 14 Acquisition of shares in an AS requires the consent of the company’s board of directors unless otherwise provided for in the articles of association. The shares in an ASA must be registered with the Norwegian register of securities. This is optional for an AS. An ASA may have non-voting shares or shares with limited voting power for up to half the share capital. An AS may freely limit the voting rights of its shares. The formation rules are generally the same for an ASA and an AS. The documentation requirements in connection with non-cash contributions are somewhat more stringent for an ASA. This also applies when the share capital is to be increased. In certain cases, a shareholder in an AS is entitled to demand that his shares be redeemed by the company. In certain cases, the company may also demand that a 616

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1. Character of the limited companies

Norway

15

shareholder’s shares be redeemed. With the permission of the Norwegian Ministry of Justice, an ASA may redeem small shareholdings (NOK 500 or less). In an AS with less than 20 shareholders, the general meeting may be held without an actual meeting being convened as long as none of the shareholders so demand. In an ASA, a meeting must be held in order for the general meeting to adopt valid resolutions. There are different requirements regarding the number of directors and the general management. For an ASA, ASAL regulates the use of some financial instruments. No equivalent rules have been enacted for an AS. The rules on mergers and demergers are less complicated for an AS than for an ASA. Pursuant to the Accounting Act the additional information to be supplied in the annual accounts is considerably more comprehensive. The valuation rules, however, are not materially different.

II. Public and private limited companies 1.

Character of the limited companies

a)

Character of the ASA

There are about 600 ASAs in Norway, a relatively small number compared to the 15 number of private limited companies. The share will be registered with the Norwegian register of securities, and the name ot the shareholders is public information available from the company itself. An ASA may be listed on the stock exchange. b)

Character of the AS

There are tens of thousand private limited companies ranging from significant compa- 16 nies of considerable size to “one man operations”.

2.

Formation

A limited company may only be formed by simultaneous formation. The whole share 17 capital must be paid up within three months after the signing of the memorandum of association. If the company is to pay the formation expenses, an equivalent amount Jo Rodin

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Norway

II. Public and private limited companies

must be paid in with the share capital. Payment in excess of this is allocated to the premium reserve. The disclosure requirements relating to non-cash contributions and the valuation of such contributions have been made more rigorous compared with the Companies Act of 1976. The memorandum of association consists of the minutes from the formation meeting, the subscription for shares and the articles of association. The documents are fairly standardised in most cases. a)

Formation procedure

18 The only legal way in which to form both an AS and an ASA is by simultaneous formation. Simultaneous formation means that the drawing up of the memorandum of association and the subscription for shares take place at the same time. aa)

Minimum share capital requirements

19 Minimum share capital requirements in accordance with section 3-1 (1): – NOK 100,000 for an AS – NOK 1,000,000 for an ASA The contribution of share capital is calculated net after deduction of the formation expenses. The minimum share capital in the opening balance sheet is NOK 100,000 for an AS and NOK 1,000,000 for an ASA. Therefore, if the company is to cover the formation expenses, the shares must be subscribed for at a premium. See also 2.e). 20 In connection with the formation, an opening balance sheet must be prepared which will form an Appendix to the memorandum of association, cf. section 2-8. The auditor must confirm that the opening balance sheet has been prepared in accordance with the rules of the Accounting Act. An opening balance sheet must be prepared even if the share capital is paid in solely in cash. The opening balance sheet may be dated up to four weeks prior to the formation. bb) Payment of share capital contributions

21 The memorandum of association must stipulate when share capital contributions – either in the form of cash or as non-cash contributions – shall be paid in, cf. section 2-3 (1) no. 4. This must be seen in connection with the registration of the company. Within three months of the signing of the memorandum of association, the company must be registered with the Register of Business Enterprises, cf. section 2-18 (1). The whole share capital must be fully paid up prior to registration, cf. section 2-18 (2). This means that the share capital contribution must be paid three months after the formation of the company at the latest, but the memorandum of association may stipulate an earlier date for payment. To ensure that the share capital contributions have actually been received by the company, the auditor must confirm the company’s notification to the Register of Business Enterprises of such receipt. The confirmation must be enclosed with the applica618

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tion for registration with the Register of Business Enterprises. This means that the company cannot be registered before such confirmation has been provided. If the share capital contribution reported to the Register of Business Enterprises and 22 confirmed by an auditor has nevertheless not been fully paid-up, the board of directors and the auditor will be jointly and severally liable for the unpaid share capital, cf. section 2-19, see also 12. This liability will apply even if no one has suffered any financial loss as a result of the insufficient payment. cc)

Non-cash share capital contributions

If an agreement exists that a shareholder must pay, wholly or in part, the share capital 23 contribution as a non-cash contribution, this agreement must be included in the memorandum of association, cf. section 2-4. Alternatively, the memorandum of association may refer to the agreement, which must then be enclosed. It is a prerequisite that the non-cash contribution can be recognised in the balance sheet as an asset in accordance with the existing accounting rules. One way to use goodwill and other intangible assets as share capital contributions will also be retained, provided that such assets may be recognised in the balance sheet. The use of an obligation to perform work or provide a future service for the company as a share capital contribution is prohibited. Thus, future consultancy services cannot be used as payment for becoming a co-owner of an AS or an ASA. In connection with non-cash contributions, a statement must be prepared and enclosed with the memorandum of association, cf. section 2-6. The same applies if an agreement has been entered into to the effect that the company is to buy certain assets or if an agreement has been entered into which grants someone specific rights or advantages in relation to the company. An option granted to a shareholder to participate in a future share capital increase at a price fixed in advance is mentioned as an example of the latter. In an AS, the promoters of the company are responsible for the preparation and the 24 contents of the statement relating to non-cash contributions. In an ASA, the promoters must ensure that the statement is prepared by one or more independent experts, for example by a state authorised or registered public accountant. The statement must describe each individual contribution. It must also contain information on the principles used for the valuation of the assets to be transferred to the company, e.g. whether an appraisal has been carried out or whether the values are based on estimated market value, stock exchange prices, etc. When the promoters of an AS have prepared such statement, a state authorised or registered public accountant must confirm the correctness of the statement. Normally, such confirmation will be provided by the company’s elected auditor. The confirmation must be enclosed with the memorandum of association to the Register of Business Enterprises, cf. section 2-6 (3).

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The value of intangible assets is often related to expectations of future earnings. The valuation is, therefore, often uncertain. For this reason, the statement must, in particular, give an account of the assumptions and principles on which the valuation is based. The statement must also contain a declaration from the promoters confirming that the value of the non-cash contribution is at least equivalent to the nominal value of the shares plus any premium. Assets which are used as a share capital contribution must as a rule be valued at their fair value on the opening balance-sheet date. This value may be higher than the book value of the asset in the promoter’s balance sheet. dd) Formation expenses

25 The concept of “formation expenses” covers all expenses necessary for the formation and registration of the company: – Lawyer – Preparation of articles of association and memorandum of association and forwarding to the Register of Business Enterprises; – Auditor/Public Accountant – Confirmation that the share capital has been paid-up and preparation of a special statement in the case of non-cash contributions; – Charges – Registration with the Register of Business Enterprises (NOK 6,000 in early 2005). An agreement may state that one or more of the promoters are to cover the formation expenses. In such case, it is not necessary to pay more than the nominal share capital, i.e. minimum NOK 100,000 in an AS. ee)

Share premium reserve

26 If the shares are subscribed for at a premium, the premium must be allocated to a premium reserve, cf. section 3-2 (1). This applies to amounts in excess of the nominal share capital and the formation expenses. The premium reserve will form part of the company’s undistributable equity. b)

Registration procedure/commercial register

27 Norway has a national register for all corporate and company filings (key info for all companies is available on www.brreg.no, from the moment the company is registered). Registration of a new company is done by way of filling out a registration form with required info on company, board, CEO etc. The registration form must be accompanied by a certified (lawyers certification) company of formation document, auditors confirmation as to paid up share capital and opening balance and the opening balance itself, plus potential public consents in the event that they are required. The registration takes 8-10 days, but an expedited process can be arranged in many instances. 620

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The company will appear on the registrar’s home page with key details, including registration number, the very instant it has been registered. The register will also send a registrations confirmation and a company certificate. c)

Approval requirements

In certain cases, and for certain business objects, there is a requirement for public 28 consents; most typical in respect of financial institutions and insurance corporations. While the company as such may be registered prior to consents being granted, it may not register its business objective as e.g. “bank” prior to the consent being granted, it may of course not trade as such prior to approval. Once the necessary approval has been granted, the business objective can be amended in the articles and registered. d)

Shelf companies

Shelf companies are generally available, but are seldom used apart from in transaction 29 when it is important to have a registered company available at the “spur of the moment”. The shelf company must have a share capital of NOK 100,000 (the minimum share capital), and attract certain costs in respect of accounting /auditing, while “dormant”, and the dormant company must also have a board etc. Generally speaking, there is not much use of shelf companies, and with an expedited registration process, and relatively simple and quick formation process, not much need for them. e)

Cost, duration etc.

The cost to form and register a company (irrespective of public or private) will seldom 30 exceed NOK 20,000 (incl. lawyer fees, and registration fees) (approx J 2,500) for the formation and registration process itself. The corporate documentation and registration form can be drawn up in a matter of hours (most of it being subject to electronic forms), and provided that the share capital is readily available, and an auditor in place, be sent for registration the same or the next day. The registration can be done immediately (if granted an expedited process) or within 8 days. Norway does not have a “notary”-system and any lawyers (or the auditor of the shareholders / board themselves) can undertake the necessary procedures. f)

Pre-incorporation status

Following the formation meeting, it is a legal requirement that the company is regis- 31 tered within 2 months.

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Prior to registration the company may trade as “under formation”, but the board and the shareholders will be liable for any deficits or losses, should the company not be registered and liabilities /obligations not be met with. g)

Company stationary

32 It is a requirement that the full company name (including company form – AS or ASA) and the registration number appears on stationary, invoices etc. Normally, the registered address shall also appear, but for companies with several addresses that is not always adhered to. The VAT registration number is the same as the commercial register registration number. To the extent that the company is VAT-registered, the letters VAT (“MVA”) will appear after the registration number on stationary etc. There are no requirements as to other information (e.g. on CEO /general manager etc.) on the stationary.

3.

The shareholders

a)

Rights and duties

33 The very essence of shareholders’ rights is the right to vote (unless curtailed) and the right to dividend. Unless specified in the articles (or a shareholders’ agreement) the shareholders have no particular duties. aa)

Dividend

34 The main rule is that companies must have a sound equity, and this in effect. 35 There are quantitative restrictions on the distribution of dividend, and stipulated dividend may only be distributed on the basis of: – Profit for the year; and – Other equity. 36 In the Accounting Act the concept of “Other Equity” is a residual item under equity. Normally, the item is the result of retained profit for the year. Before a dividend may be declared, deductions must be made for any uncovered loss. Deductions must also be made for any allocations to other reserves stipulated in the articles of association. Furthermore, the articles of association may also contain restrictions on the declaration of dividends which must be taken into account. Deductions must also be made for any carrying amount of expenses relating to research and development, goodwill and net deferred tax benefit. In addition, deductions shall be made for loans to 622

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shareholders, board of directors and general manager, as well as the nominal value of own shares. It follows from section 8-1 (2) that dividend cannot be distributed if the equity con- 37 stitutes, or will constitute, less than 10 % of the balance sheet total. In this context, the balance sheet total means the book total and not the total based on fair values. However, the provisions allow for a distribution of dividend even if this “10 % requirement” has not been met. In such case, the company must notify its creditors in the same way as in case of a reduction in the share capital, cf. sections 12-4 and 12-6. It shall also be taken into consideration whether the distribution of dividend is in accordance with prudent and generally accepted business practice. The term “distributable equity” is defined as that part of other equity which may be distributed as dividend (after account has been taken of R & D, goodwill, net deferred tax benefit, loans and own shares and the 10 % rule). b)

Shareholders’ meeting

The general meeting is an assembly of shareholders and is the supreme authority of the 38 company. The concept of the general meeting is used both to refer to the company body as such and to refer to the meetings of this body. All shareholders are entitled to attend the general meeting. In an ASA, the articles of 39 association may lay down a requirement that the shareholders give the company prior notice. The shareholders may attend the general meeting in person or by proxy. The shareholders have a right to bring an adviser and may grant one adviser the right to speak, cf. section 5-2. The general manager and the chairman of the board of directors must be present at the general meeting, cf. section 5-4 of ASL and section 5-5 of ASAL. Other members of the board of directors may also attend the general meeting. The general manager, the chairman of the board of directors and other members of the board are entitled to speak at the general meeting. Members of the corporate assembly have the same right to attend and speak at meetings as members of the board of directors. The auditor is entitled to attend the general meeting. If matters of a nature deemed to require the presence of the auditor are to be discussed, the auditor is under an obligation to attend the general meeting. The ordinary general meeting must be held within six months after the end of the financial year, cf. section 5-5 (1) of ASL and section 5-6 (2) of ASAL. Section 5-5 (2) of ASL and section 5-6 (2) of ASAL govern the business to be discussed 40 at and decided on at the general meeting in an AS and an ASA respectively. This includes: – the annual accounts and directors’ report, including declaration of dividend; – election of the board of directors; Jo Rodin

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– – – – –

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election of the auditor; election of the chairman of the board of directors; election of the corporate assembly; amendments to the articles of association; a decision on merger /demerger.

41 The board of directors convenes the general meeting in writing, giving at least one week’s notice. The articles of association may stipulate a longer period of notice, cf. section 5-10. For companies with a corporate assembly (cf. below), the articles of association may stipulate that the chairman of the corporate assembly, and not the board of directors, is responsible for convening the general meeting. The notice convening the general meeting must state the business to be transacted at the general meeting. The general meeting cannot deal with other matters than those stated in the notice convening the general meeting, cf. section 5-14. Other business cannot be dealt with unless all shareholders consent to this. By all shareholders is meant all registered shareholders, not just those shareholders who attend the general meeting. 42 The articles of association may stipulate that a specific person, for example the chairman of the board of directors, is to chair the general meeting. If there is no such provision in the articles of association, the general meeting must elect a chairman of the general meeting, cf. section 5-12 (2) of ASL and section 5-12 (3) of ASAL. The chairman of the board of directors, or if applicable the chairman of the corporate assembly in companies with a corporate assembly, opens the general meeting, cf. section 5-12 (1). The board of directors, or if applicable the corporate assembly, may appoint another person to open the general meeting. If the articles of association contain a provision that a specific person is to chair the general meeting, this person shall open the general meeting. The district court is to appoint the person responsible for opening the general meeting of an ASA, if shareholders representing more than 20 % of the share capital so demand, cf. section 5-12 (2) of ASAL. 43 The person opening the meeting must present to the general meeting a list of the shareholders present and their voting rights. This list must be used as the basis for determining who is entitled to vote unless it is amended by the general meeting, cf. section 5-13. In connection with a vote on the list presented, only those who are entitled to vote in accordance with the list originally presented may vote. This is why it may be important to have control over who is to open the general meeting. The chairman of the general meeting must ensure that minutes are taken, cf. section 5-16. As a general rule, each share carries one vote. 624

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It may be stipulated in the articles of association that a class of shares is not to have voting rights or that a class of shares is to have limited voting power. Such restrictions may also be stipulated for persons, cf. section 5-3 of ASL. The provisions of the Limited liability companies Act which grant rights to each shareholder or to shareholders owning or representing a certain part of the share capital of the company, shall also apply to holders of non-voting shares or shares with limited voting power. This applies to, for example: – a demand for an inquiry, cf. section 5-25 (2) of ASL; – a demand to bring a claim for damages on behalf of the company, cf. section 17-4 of ASL. The authority to act as shareholder is linked to registration in the register of shareholders for an AS and in a register of securities for an ASA. Legal protection for the share acquisition is therefore obtained on notification to the company or upon registration in the register of securities. c)

Shareholders resolutions

As a general rule, each share carries one vote, but the articles of association may 44 contain restrictions on the voting rights attached to a person or share, cf. section 53 of ASL and section 5-4 of ASAL, see 5.d) and 6.c) below. The voting right does not apply to shares owned by the company itself or by a subsidiary. Furthermore, a shareholder cannot participate in a vote on matters which concern a legal action brought against such shareholder or which concern such shareholder’s liability in relation to the company. The same applies in connection with actions against other parties or other parties’ liability in relation to the company if the shareholder has a material interest in the matter and this interest may conflict with the interest of the company. At the general meeting, a simple majority requirement applies unless otherwise provi- 45 ded by the Act, cf. section 5-17. This has the effect that, for example, election of the board of directors, a decision on dividend and election of the auditor are decided by simple majority (more than half of the votes cast). In the event of parity of votes, the chairman of the general meeting has the casting vote. The statutory provisions regarding the simple majority requirement may be derogated from in the articles of association. Amendments to the articles of association are adopted by the general meeting. For such 46 amendments, there is a statutory minimum requirement of 2/3 of both the votes cast and the share capital represented at the general meeting, cf. section 5-18. The articles of association may stipulate more stringent requirements for amendments to the articles of association, for example that the support of 3/4 of those present be required.

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In accordance with section 5-19, certain resolutions require the support of more than 9/10 of the share capital represented at the general meeting as well as the same majority as is required for an amendment to the articles of association. This applies to resolutions which involve the following: – that the right to acquire shares in the company shall be subject to the consent of the company; – that the shareholders’ right to dividend or to the company’s assets is to be reduced. Both ASL and ASAL contain provisions on unanimity for certain resolutions, cf. section 5-20. This applies for example to a change in the legal relationship between previously equally ranking shareholders and to an increase in the shareholders’ obligations to the company. 47 Irrespective of the above, the general meeting may not make any decisions which are capable of giving certain shareholders or other persons an unreasonable advantage at the expense of other shareholders or the company, cf. section 5-21. This provision is an “omnibus clause”, which is of special importance in cases in which there are no special statutory provisions governing the resolutions in question. 48 The board of directors may, at its own initiative, convene an extraordinary general meeting, cf. section 5-6 of ASL and section 5-7 of ASAL. The board of directors must also convene an extraordinary general meeting when this is demanded in writing by either: – shareholders representing at least 10 % of the share capital in an AS and at least 5% of the share capital in an ASA; – the auditor; or – the corporate assembly, or the chairman of the corporate assembly. In an AS, the Act allows for a simplified procedure for dealing with matters by a written vote without a meeting being held, cf. section 5-7 of ASL. This only applies if the company has less than 20 shareholders. A shareholder, a board member or the general manager may all bring actions claiming that a resolution adopted by the general meeting is invalid, cf. section 5-22. Such actions may also be brought by a majority of the employees or, alternatively, by a trade union representing 2/3 of the employees. A shareholder may propose an inquiry into the company’s formation, management or accounts, cf. section 5-25. The motion requires the support of at least 10 % of the share capital represented at the general meeting. The motion must subsequently be submitted to the district court, which may reject an inquiry if it does not find that there are reasonable grounds for an inquiry. The costs of such an inquiry shall be borne by the company, cf. section 5-26 (4).

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aa)

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Shareholder exclusion – redemption of shares at the shareholder’s and the company’s option

There are no rules laid down in law on exclusion of shareholders. However, redemption 49 of shareholders play an important part in several cases. Rules have been adopted concerning a shareholder’s right to have his shares redeemed by the company. Rules have also been passed concerning redemption of shares at the company’s option. These provisions take the form of exemption rules. bb) The shareholder’s right to demand that his or her shares be redeemed by the company The rules on redemption only apply to an AS and are set out in section 4-24 of ASL.

The Act relating to public limited companies does not contain a corresponding rule. The rules on minority protection are the result of balancing two considerations; on the one hand the opportunity afforded to the individual shareholder to safeguard his interests in the company and, on the other hand, the need for efficient management and operation of the company. Under the Companies Act of 1976, a shareholder did not have a general right to demand that his or her shares be redeemed by the company. The general rule and clear principle is that a shareholder who wants to withdraw from the company must still do so by selling his shares even if there is disagreement or dissatisfaction with how the majority of the shareholders are using their position in the company. As it might be difficult to find a buyer who will offer an acceptable price, a safety valve is necessary to enable the shareholder to pull out of the company. In such situations, a shareholder’s right to withdraw from the company by receiving payment for his interest in the company may be the only possible way to realise the value of the shares while at the same time solving serious, permanent problems regarding the future operations of the company. Weighty reasons are required for a shareholder to be granted a right to withdraw from a company by redemption, cf. section 4-24 (1) of ASL. The following situations are relevant examples: – The company’s general meeting, board of directors or other company bodies or persons representing the company have acted in contravention of the rule on the abuse of authority set out in sections 5-21 and 6-28. – A shareholder has abused his influence in the company. An example of such abuse would be if the company has bought an object from a majority shareholder at a considerable overcharge. – A permanent, serious conflict of interests regarding the operation of the company has occurred between the shareholder who wants to pull out of the company and other shareholders. The conflict of interests must be of such an irresolvable nature that there is little reason to believe that it can be resolved. The redemption price must be at least equivalent to the fair value of the shares at the time of presenting the demand, cf. section 4-17 (5). The book values of the company’s assets must therefore be adjusted to arrive at their fair value in connection with the calculation of the redemption price. Jo Rodin

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A shareholder is prevented from exercising the right to have his shares redeemed if his or her withdrawal would result in material damage to the company’s business activities or would have some other unreasonable effect on the company. In this connection, the impact of redemption on the company’s liquidity or capital base must be evaluated. A balancing of interests must also be made between the shareholder’s interest in withdrawing from the company and the company’s interest in not having to redeem the shares. The company may also avert a demand for redemption by appointing another party who is willing to take over the shares in return for payment of the redemption price. A dispute regarding redemption at the shareholder’s option shall be decided by the courts. It is the shareholder who is demanding redemption who has to bring the action before the court. Redemption is implemented by the shares being cancelled in accordance with the rules on a reduction in the share capital. Alternatively, the company may acquire its own shares if the company’s distributable equity in the most recent balance sheet exceeds the price to be paid for the shares. In such case, this must be confirmed by the auditor, cf. section 4-24 (4) of ASL. Any losses which may have been incurred since the most recent balance-sheet date must be taken into account in connection with this evaluation. d)

Compulsory redemption of shareholder

50 Both ASL and ASAL contain rules on the redemption of a shareholder at the company’s option, but their wording differs and they will therefore be dealt with separately. An AS’ right to demand that a shareholder be redeemed of his share(s) is governed by section 4-25 of ASL. The preparatory works to the provision are based on the assumption that the demand for redemption relates to a minority shareholder. The provision is not intended to provide a minority grouping with the opportunity to demand redemption of the shares of a majority shareholder. The following conditions may result in redemption of shares at the company’s option: – if a shareholder has failed to meet his obligations to the company by material breach; – if a serious and permanent conflict of interests has occurred regarding the operation of the company; – there are other weighty reasons which warrant redemption. Here, a balancing of interests must take place in which it is required that the company’s interest in redemption must clearly outweigh the interests of the shareholder. A demand for redemption must apply to all the shares held by the shareholder in the company and not just to part of the shareholding.

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51

The redemption price must be at least equivalent to the fair value of the shares at the time at which the demand is made, cf. section 4-17 (5). The book value of the company’s assets must therefore be adjusted for possible excess values to arrive at the fair value. A dispute concerning redemption at the company’s option shall be decided by the courts. It is the company which has to bring the action before the court. Following a motion from the board of directors, the general meeting is responsible for deciding whether to bring an action for redemption. A simple majority resolution by the general meeting is required. The minority shareholder for whom redemption is proposed may vote at the general meeting when it discusses the matter. The shareholder for whom the company is demanding redemption may transfer his shares to another shareholder appointed by the company for a consideration at least equivalent to the redemption price. On redemption, the company must either acquire the shares as own shares or reduce the share capital. Following a claim from the company, the court may order that the shareholder for whom redemption is demanded cannot exercise his rights as a shareholder while the case is pending in the court. An ASA may offer to take over shareholdings which have a total value of less than NOK 500, cf. section 4-24 (1) of ASAL.

4.

The shares

a)

Classes of shares

Companies may have several classes of shares, one or more of them without voting 51 rights. In Norway there are no bearer shares. In an AS all shares are registered in the company’s register of shareholders. In an ASA all shares are registered in the Norwegian securities register, and they are freely transferable. b)

Transfer of shares

aa)

Private limited companies (AS)

(1)

General

Pursuant to ASL, all AS companies must keep a register of shareholders. The board of 52 directors is responsible for ensuring that a register of shareholders is set up after the Jo Rodin

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company has been formed, cf. section 4-5 of ASL. The register of shareholders must be kept securely and it may be kept electronically. Legal protection for a charge on shares created by agreement is similarly obtained on notification to the company, if it is an AS, cf. section 4-8 of ASL, and pursuant to the Registers of securities Act, if it is an ASA. (2)

Shareholders register

53 The register of shareholders must contain the following information: – shareholders must be entered alphabetically stating name or company, date of birth or organisation number and address; and – the number of shares and share numbers must be stated for each shareholder. If the company has more than one class of shares, it must be stated to which class the shares belong. When a shareholder has been registered in the register of shareholders, the company must notify the shareholder thereof. The notification must be dated and state the information registered regarding the shareholder. This notification is the so-called share certificate. If the information registered in the register of shareholders is changed, the shareholder must also be notified thereof, cf. section 4-10 of ASL. The entry in the register of shareholders or the date of notification to the company determines when a shareholder can exercise his /her rights. Until such time, the previous shareholder is entitled to exercise, for example, the voting right. Regarding the right to dividend, other distribution from the company and the right to new shares in connection with an increase in the share capital, the transferee is entitled to exercise these rights as soon as the shares are transferred and, therefore, prior to notification being given to the company, cf. sections 4-2 and 8-3 of ASL. Legal protection for the acquisition of the share is established upon notification to the company. The transferee must immediately notify the company of his share acquisition, cf. section 4-12 of ASL. The company is under an obligation to register the new owner in the register of shareholders without delay and to state the entry date when notification from the new owner was received, cf. section 4-7 of ASL. If a share is sold to several persons all of whom are acting in good faith, the person of whom the company first receives notification will have title to the share, cf. section 4-13 of ASL. The above rules on legal protection also apply in relation to the transferor’s creditors. Instead of a register of shareholders, an AS may have its shares registered with a register of securities. In such case, the rules in ASAL apply to the registration, see 6 below. (3) Transfer restrictions in an AS

54 The general rule for an AS is that the acquisition of shares is subject to the consent of the company’s board of directors. However, the company’s articles of association may stipulate that consent is not required, cf. section 4-15 (2) of ASL. If the acquisition of shares is subject to consent, the board of directors must decide on this as soon as possible after the company has been notified of the transfer, cf. section 4-16 of ASL. A company 630

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formed under the Companies Act of 1976, without rules of consent in its articles of association, is not affected by the change in legislation. Furthermore, the articles of association may stipulate that specific qualifications are required of shareholders, cf. section 4-18 of ASL. One example is a requirement for specific professional qualifications. Consent to a share transfer may only be denied on reasonable grounds, for example in the event of a hostile takeover. Consent cannot be denied in connection with inheritance or if the transferee is a close relative of the previous shareholder or a relative in the direct line of ascent or descent. Consent is regarded as having been given if the transferee has not been notified that consent has been denied within two months of notification of the acquisition being received by the company, cf. section 4-16 (3) of ASL. The transferee must be notified of the decision without delay, cf. section 4-16 (3) of ASL. Grounds must be given for a decision to deny consent for the acquisition and the

transferee must be notified that he has the following options, cf. section 4-17 (1) of ASL:

– cancel the agreement with the transferor unless otherwise stipulated in the agreement; – dispose of the share(s); – bring legal action to contest the validity of the denial; – demand that the share be redeemed by the company. In other words, a transferee who has been denied consent may demand that the company redeem the share in accordance with the rules on the acquisition of own shares or by a reduction in the share capital, cf. section 4-17 (3) of ASL. However, such redemption cannot be demanded if the company appoints another party to take over the share on the same terms and conditions as the transferee or if redemption would cause considerable damage to the company’s business activities or have an unreasonable effect on the company. The transferee must submit a demand for redemption no later than two months after receiving notification that consent has been refused. The demand for redemption is dealt with in further detail in 8.a) below. A shareholder in an AS has a pre-emption right to shares which are to be sold or change owners in some other way. This right may be derogated from in the articles of association, cf. section 4-19 of ASL. The articles of association may also stipulate that a shareholder is entitled to take over a share which has already changed owner. It may also be stipulated in the articles of association that other parties than existing shareholders may have a preemption right.

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When the company receives notification of an intention to transfer shares to others or receives notification that shares have changed owners, the company must notify the holders of rights (shareholders and other parties, if any), cf. section 4-20 of ASL. The pre-emption right is triggered by any type of change of ownership and applies towards any transferee. An exception from this is where the transferee is a party closely related to the previous owner or a relative in the direct line of ascent or descent, cf. section 4-21 of ASL. The pre-emption right must be exercised by notification to the company, and notification must be received by the company no later than two months after the company was notified of the change of ownership, cf. section 4-23 (1) of ASL. The purchase price must be paid within one month of the demand to exercise the preemption right having been presented, cf. section 4-23 (3) of ASL. (4)

Access to the register of shareholders

55 There is free public access to the register of shareholders /register of shareholders, cf. section 4-6 of ASL. This means that shareholders, employees, creditors, public authorities and others have such right of access. The Ministry of Justice may issue more detailed regulations on the right of access and may decide that, on request, the company must provide a printout of the register of shareholders in return for a fee to be specified. At the time of writing, such regulations have not been issued. bb) Share transfers, etc. in an ASA (1)

General

56 As a general rule, shares in an ASA are negotiable. The articles of association may stipulate otherwise. All ASAs must have a register of shareholders and be registered in a register of securities. All ASAs must have a register of subscription rights in a register of securities. The Ministry of Justice may grant the company a right of compulsory redemption of small shareholdings (NOK 500). (2)

Shareholders register

57 In accordance with ASAL, all ASAs must have a register of shareholders. The board of directors is responsible for ensuring that such a register is set up with a register of securities when the company has been formed. It follows from section 4-4 of ASAL that the register of shareholders must contain the following information: – the name of the company; – the share capital of the company; – the nominal value of the shares; – each shareholder’s name, date of birth and address or – for bodies corporate – business name, organisation number and address; – the number of shares owned by each shareholder and, if applicable, the class of shares to which the shares belong; 632

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– if there is more than one class of shares in the company, which special rules apply to the shares in those classes of shares subject to special rules; – whether the shares may be redeemed without the shareholder’s consent; – any special obligations pertaining to the shares other than payment of the share capital contribution. The transferor must ensure that the register of securities is notified immediately of any change of ownership. When a shareholder has been registered in the register of shareholders, the company must notify the shareholder. This notification must be dated and state the information entered concerning the shareholder. This notification is the so-called share certificate. If the registered information is changed, the shareholder must be notified thereof, cf. section 4-9 of ASAL. It is the entry in the register of shareholders, or possibly the notification to the company, that determines whether the transferee is entitled to exercise his rights as a shareholder. On a change of ownership, the transferor loses his rights. This may have the effect that no one may exercise the shareholder rights for an intervening period before the transferee is registered in the register of shareholders. As regards the right to dividend, other distribution from the company and the right to new shares in connection with an increase in the share capital, the transferee holds these rights even if registration has not yet taken place, cf. section 4-2 of ASAL. On a change of ownership, the transferee acquires legal protection for the share upon registration with the register of securities. If two acquisitions collide, priority is determined by the date and time of the registration in the daily logbook of the register of securities. For more detailed rules, cf. Act no. 64 of 5 July 2002 relating to registration of financial instruments (the Registers of securities Act). All ASAs must have a register of subscription rights in a register of securities, cf. section 4-11 of ASAL. The register of subscription rights must contain the following: – the name of the company; – each rights holder’s name, date of birth and address or – for bodies corporate – business name, organisation number and address; – the number of shares covered by each subscription right or the number of subscription rights required to subscribe for a share; – the class of shares to which the new shares are to belong if the company has or is to have different classes of shares; – whether the subscription right is attached to a share or claim and, if so, whether the rights holder shall be able to separate the subscription right from the share or the claim.

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There is free public access to the register of shareholders and the register of subscription rights, cf. section 4-5 of ASAL. The Ministry of Justice may issue further rules on the right of access and may stipulate that, on request, the company is to provide a printout of the registers in return for a fee to be specified. At the time of writing, such regulations have not been issued. Board members, the auditor, the general manager and other executive employees of an ASA must immediately notify the board of directors of their own and closely related parties’ acquisition or sale of shares or other securities in the company, cf. section 4-12 of ASAL. The notification must be entered in a separate record, cf. section 4-12 of ASAL. No rules have been laid down on the right of access to this record, but the Ministry of Justice may issue separate regulations concerning this provision. The rules concerning the duty of notification incumbent on board members, the auditor, the general manager and other executive employees apply correspondingly to the acquisition of shares or other securities in other companies within the same group. (3) Transfer restrictions in an ASA

58 As a general rule, shares in an ASA are freely negotiable. However, the articles of association may stipulate that an acquisition of shares is to be subject to consent, that the shareholder must have specific qualifications or that a shareholder is to be entitled to take over a share which has changed owners or for which a transfer is desired. If the acquisition of shares is subject to consent, the board of directors will make a decision on this unless otherwise provided for in the articles of association. The board of directors must decide whether to grant consent as soon as possible after the register of securities has been notified of the acquisition. Consent cannot be refused in connection with inheritance if the transferee is a related party of the previous owner. Otherwise, consent may be refused on reasonable grounds. Consent is regarded as having been given if the transferee has not been notified that consent has been denied within two months of notification of the acquisition being received by the register of securities. The transferee must be notified of whether consent has been granted or denied without delay, cf. section 4-16 (3) of ASAL. Grounds must be given for a decision to deny the acquisition, and the transferee must be notified that he has the following options, cf. section 4-17 (1) of ASAL: – cancel the agreement with the transferor unless otherwise stipulated in the agreement; – sell the share(s); – bring legal action regarding the validity of the denial.

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The transferee has a deadline of two months in which to exercise the above options. If the deadline is exceeded, the board of directors may demand that the share is to be sold via the execution and enforcement authorities in accordance with the rules on enforced sale. An ASA may stipulate in its articles of association that a shareholder has a pre-emption right. It may be stipulated that the pre-emption right may be exercised when a share has changed owners or when a shareholder wants to transfer a share to others, cf. section 4-19 of ASAL. When the register of securities receives notification of a change of owners, it must immediately notify the company, which subsequently notifies the party who has a preemption right (the shareholders or other parties). The same applies if a shareholder provides this information directly to the company. The further procedure is the same for an ASA and an AS, cf. section 4-23 of ASAL. The company may submit an offer to take over small shareholdings in the company. The further terms and conditions for this are laid down in section 4-24 of ASAL: – on the date of the offer the value of each of these shareholdings must not exceed NOK 500; – the offer must be in writing; – the offer must state the redemption price per share; – the offer must state a specific deadline for acceptance of the offer. On application, the Ministry of Justice may grant the company permission to carry out a compulsory takeover of any shareholdings which are not transferred voluntarily following such an offer. c)

Own Shares

The right of an AS or an ASA to acquire its own shares has been extended compared 59 with previous legislation. Subscribing for own shares is still prohibited. An AS or an ASA cannot subscribe for its own shares, neither in connection with its formation nor in an increase of its share capital, cf. section 9-1. A share subscribed for by other parties than the company, but for the company’s account, is regarded as having been subscribed for by the other party acting as share subscriber. If a share is subscribed for in contravention of these rules, the promoters are regarded as having subscribed for the share for their own account. If a share capital increase has occurred in contravention of these rules, the board of directors is regarded as having subscribed for the share for its own account. The promoters or board members are jointly and severally liable for the amount to be paid for the share. Promoters or board members who have voted against the share subscription, or who can substantiate that they did not know nor should have known about the illegal share subscription at the time at which the decision was made, are not liable for the amount to be paid for the share. Jo Rodin

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An AS or an ASA may acquire its own shares which have been fully paid-up. The prerequisites are as follows: – The total nominal value of own shares after the acquisition must not exceed 10 % of the share capital, cf. section 9-2. – The acquisition of own shares must not result in the share capital less the total nominal value of own shares being lower than the minimum permitted share capital of NOK 100,000 for an AS and NOK 1 million for an ASA. – The company’s distributable equity in the most recently adopted balance sheet must exceed the price to be paid for the shares. – In no case may own shares be acquired in excess of a level compatible with prudent and sound business practice with due consideration being taken of any loss which may have been incurred after the balance-sheet date or which must be expected to occur, cf. section 9-3. The following are regarded as own shares: – shares which the company owns or on which the company holds a charge created by agreement; – shares acquired for ownership or as a charge by others, but for the company’s account; – shares owned by a subsidiary or on which the subsidiary holds a charge created by agreement; – shares in any parent company or on which the company holds a charge created by agreement. The board of directors must have power of attorney from the general meeting in order to acquire its own shares. A resolution by the general meeting to grant such a power of attorney requires the support of at least 2/3 of both the votes cast and the share capital represented at the general meeting. The power of attorney is valid for a specific period of time, which must not exceed 18 months. The power of attorney must state the maximum nominal value of the shares which the company may acquire in all, and the minimum and maximum amounts payable for the shares. The general meeting must also state the ways in which acquisition may be made. The notification and registration of such power of attorney with the Register of Business Enterprises must take place before the shares may be acquired pursuant to the power of attorney, cf. section 9-4. The rules on the acquisition of own shares apply correspondingly to the creation of a charge on own shares, cf. section 9-5. The above provisions do not prevent the acquisition of own shares by gift, by enforcement to cover the company’s claim, by takeover of another business through a merger or demerger or in some other way or by redemption. If the total nominal value of the holding of own shares subsequently exceeds 10 % of the share capital, the excess shares must be sold or cancelled by a reduction in the share capital as soon as possible and not later than two years after the acquisition, cf. section 9-6. If the company has entered into an agreement on the acquisition of own shares or on a charge created by agreement in contravention of the above rules, the agreement is 636

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invalid if the other contracting party realised or should have realised that the company was acting in contravention of the rules. If the invalidity is not ascertained until after the company has performed its part of the agreement, the company may withhold the share until the consideration has been repaid, cf. section 9-7. If the agreement is binding on the company, the shares must be sold or cancelled by a reduction in the share capital as soon as possible and within three months. If the share cannot be sold without a loss for the company, the parties who acquired the share on behalf of the company must take over the share on the same terms and conditions as the company. If the company holds a charge on its own shares in contravention of these rules, the charge must be terminated within three months of its being created. The above rules on the acquisition of own shares also apply to a subsidiary’s acquisition of shares or a charge created by agreement on shares in the parent company, cf. section 9-8.

5.

The articles of incorporation

a)

Mandatory content

The articles of incorporation (articles of association) may be quite simple or elaborate. 60 The basic content is the company name, the registered seat (business address), the business objective, the share capital and number of shares, the various share classes (if more classes), the number of directors on the board of directors and potentially the composition of such board. b)

Change of the articles of association

The general procedure for changing the articles of association is that the shareholders’ 61 meeting will have to be called in compliance with the rules on calling such meetings (rules set out in law or in the articles themselves). It is a general requirement that 2/3 of the shareholders present vote in favour of the amendment to the articles of association. The amendment to the articles of association must be registered with the company register on a form, attached to which must be a certified copy of the minutes from the shareholders’ meeting (certified by a lawyer or to other persons). c)

Capital increase/decrease

aa)

Increase in the share capital by new subscription for shares

The general meeting has the authority to adopt a resolution on an increase in the share 62 capital by new subscription for shares, cf. section 10-1. A reasoned motion must be Jo Rodin

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drawn up by the board of directors and enclosed with the notice convening the general meeting. The motion must state the amount of the increase. When the general meeting has adopted a resolution on an increase in the share capital, the Register of Business Enterprises must be notified of this without delay, cf. section 10-16. In an ASA, the shares must be subscribed for on a separate subscription form, cf. section 10-7 of ASAL, which must be enclosed with the notice convening the general meeting. The general meeting may grant the board of directors power of attorney to increase the share capital by new subscription for shares. The power of attorney may be granted for a maximum period of two years, cf. section 10-14. An AS cannot invite subscriptions from the general public. An AS which wants to carry out such issues must therefore first be converted into an ASA. An AS is, however, permitted to invite interested subscribers to a meeting at which subscription takes place. The increase in the share capital may take place either by payment of cash or in the form of non-cash contributions. The general rule is that non-cash contributions are valued at fair value, unless the Accounting Act provides that the previously stipulated book value be applied. The board of directors’ statement on non-cash contributions and the auditor’s confirmation of the statement, cf. section 2-6, must be enclosed with the notice convening the general meeting, cf. section 10-2 (3). The auditor’s report must not pre-date the adoption of the resolution by the general meeting by more than four weeks. In an ASA, the statement is to be prepared by one or more independent experts, see also 2.d) above. The expenses relating to an increase in the share capital must be covered from the premium reserve or distributable equity, cf. section 10-12. If this is not possible, the shareholders must pay an amount which covers both the increase in the share capital and the costs connected with it. bb) Increase in the share capital by bonus issue

63 The general meeting is responsible for adopting a resolution on a bonus issue, cf. section 10-20 (2). A reasoned motion must be drawn up by the board of directors and enclosed with the notice convening the general meeting. The Register of Business Enterprises must be notified of the general meeting’s decision to increase the share capital. The Acts do not state any deadline for the submission of such notification. In connection with a bonus issue, there is no codified requirement for confirmation by the auditor. The Register of Business Enterprises has, nevertheless, in fact demanded such confirmation. An increase in the share capital by a bonus issue may take place by a transfer from the premium reserve or from distributable equity. Transfer from other equity which is not distributable pursuant to section 8-1 (3) is not allowed. Such part of other equity which covers recognised goodwill, R & D, tax benefit, loan and own shares, is for all practical purposes the least distributable capital in the company.

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Section 10-23 (2) stipulates that in companies with more than one class of shares, shareholders may only be allocated shares in the class of shares to which their present shareholdings belong. Other arrangements may be stipulated in the articles of association. cc)

Reduction in the share capital

The general meeting is responsible for adopting a resolution on a reduction in the share 64 capital, cf. section 12-1. A reasoned motion must be drawn up by the board of directors and enclosed with the notice convening the general meeting. The motion must state the amount of the reduction and whether the reduction is to take place in the form of redemption of individual shares or by a reduction in the nominal value of the shares. The Register of Business Enterprises must be notified within two months of the general meeting’s resolution on a reduction in capital. In 1. 2. 3.

accordance with section 12-1 (1) nos. 1-3, the reduction amount may be used for: covering loss which cannot otherwise be covered; distribution to shareholders or striking off the company’s own shares; allocation to a reserve to be used as decided by the general meeting.

Calculation of the company’s loss pursuant to no. 1 must be based on the balance sheet most recently adopted by the general meeting. However, the calculation of loss may be based on an interim balance sheet adopted and audited in accordance with the rules for annual accounts. A reduction in the share capital in accordance with no. 1 may take place without notice to the creditors, cf. section 12-5. In connection with such reduction, the company cannot declare a dividend until three years after the registration of the reduction in the Register of Business Enterprises, cf. section 12-4 (1). Distribution to shareholders in accordance with no. 2 may also comprise non-cash transfers. A resolution in accordance with nos. 2 and 3 cannot apply to an amount so large as not to leave full cover for the remaining share capital and the company’s undistributable equity after the reduction. Undistributable equity must be understood as equity which is not freely distributable, cf. section 8-1 (1). In addition, a reduction entailing payment to the shareholders cannot be implemented for an amount so large that it means that the company after the reduction no longer has an equity which is sound, based on the extent of its business activities and the risk involved, cf. 3.d) above. The calculation of the reduction amount must be based on the balance sheet for the previous financial year or on an interim balance sheet, cf. new third sentence in section 12-2 (2). Furthermore, events which may have occurred after the balance-sheet date must be taken into account. Confirmation must be provided by an auditor, confirming that there will be full cover for the company’s undistributable reserves after the reduction. A reduction in share capital in accordance with nos. 2 and 3 may only be made after notice to the creditors. The deadline within which the creditors must state objections is two months from the latest notice published by the Register of Business Enterprises. When the situation with the creditors has been settled, a confirmation, signed by the Jo Rodin

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board of directors and the auditor, must be sent to the Register of Business Enterprises. The preparatory works state that in some cases the auditor will have a certain duty of examination and that, as a minimum, the auditor must make inquiries to the company on whether any objections have been received before the deadline.

6.

The board of directors and management

a)

Board of directors

65 The board of directors is a compulsory body. The board of directors is elected by the general meeting, or, if applicable, by the corporate assembly, which also decides the directors’ fees. 66 An AS with a share capital of less than NOK 3 million may have a board of directors consisting of one or two members. An ASA and an AS with a share capital of more than NOK 3 million must have a board of directors with at least three members. If the company has a corporate assembly, the board of directors must consist of at least five members. Employees are entitled to representation on the board of directors, cf. sections 6-4 and 6-5, if the company has more than 30 employees. The number of board representatives to which the employees are entitled varies with the total number of employees and also depends on whether the company has a corporate assembly. Unless otherwise stated in the articles of association, board members will serve for a term of two years, cf. section 6-6. If there are special reasons for doing so, a board member may retire before the end of the period of service, cf. section 6-7 (1). This has the effect that a board member is entitled to retire from the board of directors if, for example, illness makes it difficult for the board member in question to continue. In certain cases, board members may be removed from office, cf. section 6-7 (2). The decision in such cases lies with the general meeting. This does not apply to board members elected pursuant to the employees’ right to representation, cf. sections 6-4 and 6-5. The Act allows for board resolutions to be made outside meetings, section 6-19. The annual accounts and the directors’ report must, however, be considered at a meeting. The general manager and board members are all entitled to demand that those matters for which the chairman of the board of directors has proposed another consideration procedure, be dealt with at a meeting.

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The general manager has a right to and is under an obligation to participate in the board of directors’ discussions and is, moreover, responsible for the preparation of matters to be discussed by the board of directors. The board of directors constitutes a quorum when more than half its members are present, cf. section 6-24. However, the general meeting may stipulate more stringent requirements in the articles of association. As a general rule, a board resolution requires a simple majority of votes, cf. section 6-25. In the event of parity of votes, the person chairing the meeting will normally have the casting vote, but elections must be decided by lot. Stricter rules may be stipulated in the articles of association. A board member or the general manager cannot participate in the discussion of matters in which he or she, or a closely related party, has material personal or financial interests, cf. section 6-27. The board of directors is responsible for minutes of board meetings being kept, cf. section 6-29. The board of directors’ managerial responsibility includes the following, cf. section 6-12: – ensuring proper organisation (compulsory); – drawing up plans and budgets (compulsory); – laying down guidelines for the company (optional); – keeping up to date on the company’s financial position (compulsory); – ensuring that the accounts and asset management are subject to adequate control (compulsory). If the company does not have a corporate assembly, the board of directors makes decisions and passes resolutions on matters concerning major investments and reorganisations. The board of directors’ supervisory responsibility comprises supervision of the day-today management and the company’s business activities in general, cf. section 6-13. In addition, the board of directors of an AS is responsible for the day-to-day management if the company does not have a general manager, cf. section 6-12. Of the company bodies, only the board of directors is entitled to submit a petition for debt settlement proceedings or winding-up proceedings, cf. section 6-18. The board of directors represents the company externally and is entitled to sign for the firm, cf. section 6-30. There is no supervisory board in addition to the board of directors.

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b)

The general manager (“CEO”), management

II. Public and private limited companies

67 The person responsible for the day-to-day management of a company is called the “general manager”. All ASAs must have a general manager, cf. section 6-2 of ASAL. In an AS with a share capital of less than NOK 3 million, the board of directors may decide that the company is not to have a general manager, cf. section 6-2 of ASL. Both an AS and an ASA may have more than one general manager, cf. section 2-2. 68 In an ASA, the general manager cannot be elected as the chairman of the board of directors. In an AS, the general manager cannot be elected as the chairman of the board of directors if the company is required to have at least three board members, i.e. if the share capital exceeds NOK 3 million. The general manager is appointed by the board of directors, cf. section 6-2. The articles of association may stipulate that the general meeting, or the corporate assembly, is to be the body responsible for appointing the general manager. 69 The general manager must follow the guidelines laid down by the board of directors, cf. section 6-14. Matters of an extraordinary nature or of great importance do not come under the category day-to-day management. This applies, for example, to the sale of real property (unless the company is a property company). The general manager is responsible for ensuring that the company’s accounts are in accordance with Acts and regulations and that its asset management is organised in a sound manner. 70 In an AS, the general manager must present a report on the company’s business activities, financial position and profit /loss developments to the board of directors at least every three months, cf. section 6-15 of ASL. In an ASA, the general manager must present an equivalent report at least once every month, cf. section 6-15 of ASAL. The report may be presented in writing or at a meeting. The general manager represents the company externally in matters which concern the day-to-day management, cf. section 6-32.

7.

The corporate assembly

71 In a private limited company with a corporate assembly, the provisions on corporate assemblies set out in sections 6-35 to 6-40 of ASAL (public companies) apply correspondingly. In all companies with more than two hundred employees, a corporate assembly comprising at least twelve members must be elected, cf. section 6-35 of ASAL. Even if the conditions for a corporate assembly are not present, the articles of association may stipulate that the company shall have a corporate assembly. If a majority of the employees, or trade unions representing 2/3 of the employees, give their consent, the company 642

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may decide not to have a corporate assembly despite having more than 200 employees, in which case the employees are entitled to an extra employee board member, cf. section 6-4 (3). The general meeting elects 2/3 of the members of the corporate assembly unless other- 72 wise stated in the articles of association, cf. section 6-35 of ASAL. The remaining third is elected by and from among the employees. For period of service and termination of office, the same rules apply as for the board of directors, cf. section 6-36 of ASAL. The corporate assembly elects its own chairman, cf. section 6-36 of ASAL. The chairman of the corporate assembly convenes meetings as often as necessary and when requested by at least 1/6 of the members or by the board of directors, cf. section 638 of ASAL. The provisions on the disqualification of board members apply correspondingly to members of the corporate assembly. Their duties are stated in section 6-37 of ASAL and are as follows: – to elect the board of directors and the chairman of the board of directors; – to supervise the board of directors’ and the general manager’s management of the company; – to make a recommendation to the general meeting on whether the annual accounts proposed by the board of directors be approved; – to make decisions on matters concerning major investments and the reorganisation of operations.

8.

Capitalisation and liability issues

a)

Company capital

73

Several rules apply to protect the company capital, including a sound equity principle 74 and a duty of action for the board of directors in connection with the loss of at least half the share capital. A requirement has been introduced that the equity must constitute at least 10 % of the balance sheet total before a dividend may be distributed. b)

General requirements for the amount of the equity

A general sound equity principle has been introduced, i.e. that there must be a “sound 75 relation” between the equity of the company and the extent of the business activities of the company and the risk they entail, cf. section 3-4. This provision must be seen in

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connection with the rules on the duty of action in case of a major loss of equity, see 3.b) below. The sound equity requirement must be evaluated on the basis of a “going concern” assumption if this appears to be the most likely scenario. In addition, an overall evaluation must be made of the company’s total capital base and not just of its equity. The evaluation must be based on the fair value of the company’s equity, not its balance sheet value. If the company has assets that are not recognised in the balance sheet, for example goodwill developed by the company itself, these will form part of the fair value of the equity. The same applies to excess values, for example in real property. 76 In connection with the evaluation, emphasis must be placed on both the risk involved and the extent of the business activities. The board of directors is responsible for making this evaluation, and this constitutes an important part of the board of directors’ duty of due care. In order to determine what constitutes an acceptable risk, the type of business activities carried out by the company must be particularly considered. Similarly, in connection with major expansions of business activities, it must be considered whether the company’s capital situation justifies such expansion being made on the basis of loan capital or whether a strengthening of equity is required. Consideration must also be given to insurance policies which the company has taken out against possible liability for damages and guarantee liability. Whether the equity is smaller than can be considered sound will depend on an evaluation based on judgement. If the company is in a phase of expansion, this must normally be followed up by an increase of the capital base. In addition, it will be of importance whether the company is in a start-up phase or has reached a normal operating situation. During a start-up phase, losses and diminishing equity may occur periodically until the company has reached the profitable operating situation expected. The composition of the company’s loan capital may also be taken account of and whether the company expects income which, in accordance with a sound estimate, constitutes an asset for the company. c)

Duty of action in case of loss of equity

77 A duty of action has been introduced for the board of directors in cases where the equity of the company is lower than deemed sound, cf. section 3-5 (1). This provision entails a requirement that the board of directors pay more continuous attention to the company’s equity situation than was the case pursuant to the Companies Act of 1976. The board of directors has a duty to act before financial developments have gone so far that the company is forced to initiate winding-up proceedings. The provision on the duty of action must be considered in connection with the duty of the general manager of an AS to inform the board of directors at least every three months about the company’s business activities, financial position and profit /loss developments, cf. section 6-15 of ASL. In an ASA, such reporting must take place every month, cf. section 6-15 of ASAL. These reports and the available accounts will provide 644

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the board of directors with the necessary basis for evaluating whether the equity is sufficiently sound. The board of directors also has an independent duty of action if, at a given time, it must be assumed that the fair value of the company’s equity has been reduced to less than half of its share capital. This is a more objective rule whereby the board of directors’ duty of action will not be left to its own discretion to the same extent as in connection with the evaluation of whether the equity is sound. As the board of directors has a continuous duty to keep itself up to date throughout the year, the duty of action may arise both in connection with the annual accounts and the presentation of interim accounts or in some other way. If the equity must be regarded as unsound or if the fair value of the equity is less than half of the share capital, the board of directors must ensure that a general meeting is convened. At the general meeting, the board of directors must give an account of the company’s financial position and propose necessary measures to restore the soundness of the equity and increase it to more than half the share capital. There is no duty to convene a general meeting immediately, but it must be convened within a reasonable period of time. What constitutes a reasonable period of time will depend on the circumstances, for example whether the company is in a start-up phase. No specific time limits are stated within which the measures must be implemented, and the particular circumstances will to a large extent determine what is a natural and expedient period. To a certain extent, the purpose of the provisions is, therefore, to make the general meeting expressly aware of the situation. The duty of the board of directors does not extend beyond evaluating the circumstances and proposing possible measures to the general meeting, cf. section 3-5 (2). It is up to the shareholders through the general meeting to decide what action to take. If the board of directors is unable to present specific proposals which will ensure continued operations with sufficient equity, the board of directors must propose that the company be dissolved. Dissolution of the company will also be the result if the general meeting finds that the recommended measures cannot be implemented. d)

Transactions between the company and the shareholders

Transactions between an AS and a shareholder in which the consideration from the 78 company amounts to 10 % or more of the company’s share capital are subject to separate rules set out in section 3-8. The general meeting must approve such transactions. For an ASA, the limit in this respect is 5% of the share capital. The purpose of the rules is to prevent the requirements for disclosure and valuation of non-cash contributions being circumvented by forming the company through cash contributions, and subsequently transferring assets to the company after the formation or the increase in the share capital, in return for settlement in cash. Jo Rodin

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These rules apply to all types of agreements whereby the company is to acquire assets, services or other contributions from a shareholder in return for a consideration. They do not apply to ordinary business agreements on commercial terms and conditions. A number of small transfers, which, when taken together, total more than 10 % of the share capital in an AS and 5% in an ASA, may, depending on the circumstances, be regarded as a circumvention of the rules and thus be invalid. This will apply where the intention of splitting up the transfers is to circumvent the statutory requirements. Obvious circumventions of statutory requirements, for example where the shareholder uses a nominee, may also be covered by the rules. The rules also apply to agreements entered into by a party closely related to the shareholder. A closely related party may be, for example, a spouse or cohabitant, or another company, cf. section 1-5. The above rules apply irrespective of when an agreement is entered into. If an agreement is in contravention of the provision in section 3-8, it is not binding on the company. If the general meeting does not subsequently approve the agreement, the shareholder must repay to the company any consideration received. e)

Granting of credit and furnishing of security (“financial assistance”)

79 For the protection of the share capital, there are rules which limit the company’s right to grant credit or furnish security for, for example, shareholders’ obligations, cf. section 8-7. Moreover, this section prohibits the granting of credit and furnishing of security for the acquisition of shares in the company or in another company in the same group, cf. section 8-10. Credit may only be granted or security furnished to a shareholder or a party closely related to the shareholder within the limits of other equity which the company may distribute as dividend, i.e. distributable equity. Therefore, the equity must amount to more than 10 % of the balance sheet total. The above is subject to the shareholder furnishing adequate security for the loan granted to him by the company. In connection with the application of this provision, it must be evaluated whether there is a connection between a loan granted by the company to the shareholder and the shareholder’s purchase of shares in the company. If such a connection can be ascertained, for example that subsequent financing assistance had been assumed or agreed, the transaction may be covered by the provision. The provision does not apply to transactions made for normal commercial reasons. The furnishing of security will not be invalid if the other contracting party was acting with due care and in good faith at the time the security was furnished. If a shareholder raises a loan with a bank and the company furnishes security for the loan, this furnishing of security will be binding on the company if the bank acted in good faith.

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9. Accounting

f)

Norway

80

Liability

The company may demand that the following persons pay damages for any loss which 80 they have caused intentionally or negligently during the performance of their duties, cf. section 17-1: – members of the board of directors; – members of the corporate assembly; – the general manager; – shareholders; – the auditor; – persons conducting an inquiry. If a firm of auditors has been elected as the auditor of a company, the firm of auditors and the auditor responsible for the assignment are jointly and severally liable for damage inflicted on the company. A responsible auditor must always be appointed for each assignment. The general meeting decides whether a claim for damages is to be brought against the auditor, cf. section 17-3. Shareholders representing at least 10 % of the share capital will be eligible to bring a claim for damages on behalf of the company if the company itself does not bring such a claim. Any damages which are obtained through such an action will accrue to the company. The costs of such an action are not the company’s concern, but the company may be required to compensate costs by up to the amount which the company has received in damages, cf. section 17-3. Shareholders, creditors or other parties who have suffered a loss because of the loss inflicted on the company are bound by the company’s settlement of the claim, and the company’s claim shall take precedence over their claims. This has the effect that creditors and shareholders or other parties, for example employees, are not prevented from bringing direct actions, but that the company’s claim takes precedence, cf. section 17-6.

9.

Accounting

a)

Accounting

The fiscal year equals the calendar year. The annual financial statements must be 81 adopted by the board (incl. the board’s annual report), and subsequently the annual general meeting (the shareholders’ meeting). The AGM must take place before 30 June each year – in practice it is held one to three months prior to that in most companies. The annual financial statements (and the board’s annual report) is filed with the 82 company register, and is publicly available. Extracts are easily available via the Internet.

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83

Norway

II. Public and private limited companies

The two Acts relating to limited liability companies do not contain separate chapters on accounts as did the previous Companies Act. The accounting rules for AS companies and ASAs are laid down in the Accounting Act. For further information, cf. Books Online Norwegian Accounting Act. b)

Audit requirements

83 Chapter 7 in ASL and ASAL contains certain rules on auditing. The rules regarding the performance of the audit are incorporated in the Auditing and Auditors Act. The Auditing and Auditors Act was enacted on 15 January 1999. It contains several of the regulations previously found in company legislation. With no major changes, the rules on independence, sound auditing practice, the audit report and other reporting from the auditor in consecutively numbered letters have been retained. Under company legislation, the auditor is a separate company body. The general meeting must elect one or more auditors and may also elect one or more deputy auditors. The bankruptcy court shall order the dissolution of the company if an auditor who meets the statutory requirements, cf. section 16-15 (1), has not been elected. The auditor must be a registered or state authorised public accountant. Previously, in limited liability companies in which the public sector (municipality or county) had more than 50 % of the votes, the municipal or county auditors could be elected as auditor. This is no longer permitted. As was the case under the Companies Act of 1976, the auditor must serve until a new auditor has been elected. In accordance with section 7-3 (2) 2, the bankruptcy court may, by order, appoint an auditor in addition to the auditor or auditors elected by the general meeting when this is demanded by shareholders representing at least 10 % of the share capital in an AS. In an ASA, only 5% of the share capital is required to support the demand. The bankruptcy court will stipulate the period of service and fee for an auditor who may be appointed in accordance with this provision. The auditor is entitled to attend the company’s general meeting and is under an obligation to attend when this is regarded as necessary. The auditor is obliged to answer relevant questions about the company when this is required by the general meeting, a member of the board of directors, the general manager or a person conducting an inquiry and in an ASA, also following a demand from a member of the corporate assembly. The auditor may demand to be allowed to answer questions from a board member at a meeting of the board of directors. The auditor cannot demand to be allowed to answer questions from a member of the corporate assembly at a meeting, as previously pursuant to the Companies Act of 1976.

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10. Taxation

Norway

84

10. Taxation All companies limited by shares are separate entities for tax purposes. The corporate tax 84 rate is 28%. Dividend distributions to companies are not subject to tax if the recipient is a company. Individual shareholders are subject to tax at a rate of 28%. These rules are proposed to change. It should be mentioned that general partnerships and limited partnerships are transparent entities for tax purposes.

11. Termination of the business a)

The formal proceedings of liquidation

The Norwegian Limited Company Act (the “Act”) sets out the proceedings that must 85 be followed when liquidating the company: – A resolution to liquidate the company must be adopted by the General Meeting of the Company, and a liquidation board must be elected. – Filing of registration form must be made with the Norwegian Register of Business Enterprises informing that it has been decided to liquidate the company and that a liquidation board has been elected. – The Norwegian Register of Business Enterprises will issue a notification to the creditors, containing a two-month time limit for creditors to report their claims. – The Company should, as far as possible, specifically notify all creditors with a known address that it has been decided to liquidate the Company. – The liquidation board should register all of the Company’s assets, privileges and obligations, and prepare a balance sheet. The balance sheet shall be audited, and the auditor’s certificate be made available to the shareholders for their inspection at the Company’s offices, and a copy thereof together with the auditor’s report shall be sent to each shareholder. – The assets of the Company should be sold, and the obligations of the Company should be fulfilled/met. The liquidation board must consider if uncertain or disputed claims must be secured through allocations. – When the deadline for the creditors to report their claims has expired, and the necessary allocations are made, the assets of the Company should be distributed to the shareholders. – The Company must deliver tax returns and claim an advanced tax assessment. – A General Meeting should be held to approve the final liquidation settlement. – The Norwegian Register of Business Enterprises shall be notified that the company is finally liquidated.

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86

Norway

b)

Liquidation board

II. Public and private limited companies

86 As set out above, the General Meeting should elect a liquidation board. This board shall take over the management of the day to day operations instead of the previous board and the managing director. However, there is nothing to prohibit the General Meeting from electing the previous board as the liquidation board. When it is decided that the Company shall be liquidated, the company shall no longer have a managing director. The Act contains legislation for the board of the company and the managing director. Such legislation also applies to the liquidation board. c)

Obligations of the directors / board members

87 The liquidation board may incur responsibility in connection with the liquidation. All persons are responsible for actions or omissions that are deemed to be negligent. If such negligence results in a loss for a third party, the negligent person is responsible for such loss. This principle also applies to actions or omissions by a director or board member of a company. According to the Act § 16-12, the members of the liquidation board are responsible, without any limitations, for creditors who have not received satisfaction for their claims or whose claims are not sufficiently covered by allocation, unless it is established that the members have acted with due care. Thus, the deadline for creditors to report claims is not preclusive. A creditor’s claim will, however, be time-barred, after three years after the final liquidation is registered with the Norwegian Register of Business Enterprises. d)

Obligations of the shareholders

88 The shareholders are jointly and severally liable, limited, however, to the value each of them has received as his liquidation part, to creditors whose claims have either not been paid or have not been adequately secured during the liquidation. e)

Taxation issues

aa)

Advanced tax assessment

89 As set out in paragraph, above, the Company must file an ordinary tax return before the company is finally liquidated. The tax return shall include all earnings and expenses from the beginning of the year up to the date of the General Meeting approving the final liquidation settlement. In connection with the tax return, the company is obligated to ask for an advanced tax assessment. It is important that the Company also explicitly asks the tax authorities to acknowledge, in writing, that the claim for an advanced tax assessment has been received. Any tax demands will be precluded if not presented to the Company within three months from such acknowledgement. 650

Jo Rodin

12. Insolvency

Norway

90

Since the advanced assessment shall include the date of liquidation, it will not be possible to complete the assessment before the Company is liquidated. Therefore, it is important that the liquidation board makes sure that a sufficient amount is retained to pay the taxes. bb) Taxation of the Company

If the Company sells all the assets of the company with a gain, ordinary capital gains tax 90 will be levied (at a 28% rate). However, capital gains may be set off against losses in the year of liquidation and the two previous years. If the assets are distributed to the shareholders in kind, the Company will also be levied capital gains tax to the extent the fair market value of the assets is higher than the book value. cc) Taxation of the shareholders in the Company

A liquidation of the Company will be deemed to be a realisation of the shares of the 91 company for tax purposes. This means that the difference between the liquidation proceeds received and the cost price of the shares in the Company will be taxable income for the shareholders at a rate of 28%. This will not apply when the shareholder is not resident in Norway. f)

Duration of liquidation proceedings

We assume that if no special circumstances exist, such as continuing contracts etc 92 which may delay the liquidation proceedings, the liquidation proceedings should be completed within a period of approximately three months.

12. Insolvency a)

Introduction

Norwegian insolvency legislation is contained in the Norwegian Bankruptcy Act of 8 93 June 1984 No. 58 (the “Bankruptcy Act”), which sets out the various procedures to be followed, and the Recovery Act of 8 June 1984 No. 59 (the “Recovery Act”) containing provisions regulating priority of claims and revocation of certain pre-liquidation transactions. b)

Summary of Norwegian insolvency proceedings

Norwegian insolvency legislation can be said to prioritise the timely recovery and realisation of underlying assets, rather than the rescue of the company/debtor as such and generally follow internationally recognised standards with: – A seizure and subsequent disposal of debtor’s assets, – assessment and ranking of claims, – testing and revocation of transactions made prior to bankruptcy, – and continued operation of the company at the risk of, and (in practice) only if guaranteed by, creditors.

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94

Norway

c)

Bankruptcy proceedings

II. Public and private limited companies

94 To place a debtor into bankruptcy proceedings in Norway the court must find that the debtor is insolvent, i.e. the company must be displaying a continuing non-temporary inability to pay its debts as and when they fall due (cash flow test), while at the same time having liabilities that exceeds its assets (balance sheet test). 95 Bankruptcy proceedings are opened following a petition from a creditor or the debtor itself to the local court where the debtor has its headquarters. The court will request a cash deposit of NOK 42,250 from the petitioning creditor (does not apply to the debtor) to secure court fees and basic costs related to the proceedings. 96 In Norwegian limited liability companies, only the board of directors is entitled to file a bankruptcy petition on behalf of the company. The individual directors may be liable to the company (the bankruptcy estate) and/or its creditors for any losses incurred due to insolvency proceedings having been instigated too late (or not at all). It is a criminal offence under the Norwegian penal code not to file a petition for bankruptcy proceedings if this results in losses for creditors of the company. Continuing trading even if insolvent does not, however, automatically constitute basis for liability. 97 The company is controlled by the court appointed liquidator (generally an attorney-inlaw). The liquidator is often assisted and supervised by a creditors’ committee. 98 The general task of the liquidator is to turn all assets into cash in the manner assumed to be most profitable for the estate and then distribute the available cash to the creditors. 99 All the company’s assets will in practice be seized and the debtor may not dispose of the seized assets in any way while the bankruptcy proceedings are ongoing. 100 To allow the liquidator sufficient time to dispose of the assets of the estate in the way that is most profitable for the estate, the Bankruptcy Act provides for a six (6) months’ period after the opening of bankruptcy proceedings during which no secured creditor may carry out any forced sale of the debtor’s pledged assets without the liquidator’s express permission. 101 The liquidator can decide that the business will continue to trade only if this is regarded as being in the best interest of the estate as such. New debt incurred by the estate will be regarded as preferential debts. The liquidator will therefore normally seek to obtain guarantees from creditors in favour of the estate (to cover debts to suppliers, etc). 102 Certain transactions prior to the bankruptcy opening can be set aside or reversed by the bankruptcy estate. This particularly applies to extraordinary payments of certain creditors, security established for old debt and transaction at under-value.

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Jo Rodin

13. choice of seat outside Norway

Norway

103

In Norwegian bankruptcies, the creditors will be paid according to the following prior- 103 ity: (i) Secured claims (are covered to the extent of the value of the secured asset) (ii) Claims which arise during the bankruptcy proceedings, i.e. claims of the estate (iii) Salary claims (within certain limitations) (iv) Tax claims (e.g. withholding tax and VAT within certain limitations) (v) Ordinary claims (pari passu unsecured debt, supplier debts, indemnity claims etc.) (vi) Subordinated debt d)

Debt reorganisation

(i) A voluntary debt settlement before the courts requires that all creditors accept the proposal. (ii) Compulsory debt reorganisation before the courts can be initiated only by the debtor itself. To be binding, a minimum recovery rate of 25% and a 75% majority vote is required. Certain rules apply that deviate if the recovery rate is higher.

104

13. choice of seat outside Norway The company may have representative offices, branches and subsidiaries outside Nor- 105 way.

14. Other important subjects a)

Mergers and demergers

aa)

Scope of the rules on mergers

In ASL, rules are laid down on mergers between AS companies. Mergers between ASAs 106 and mergers between an AS and an ASA are governed by section 13-1 of ASAL. A merger is characterised by one company (the transferee company) taking over the other company’s (the transferor company) assets and liabilities as a whole in return for the shareholders in the latter acquiring shares in the former in consideration. The consideration may be paid in the form of cash for up to 20 % of the consideration value, cf. section 13-2 (1). If the transferee company belongs to a group, the consideration may, instead, consist of shares in the parent company or other companies in which the parent company owns more than 90 % of the shares directly or through subsidiaries, cf. section 13-2 (2). This will often be expedient where the transferee company is the subsidiary of a parent company in which the liquidity of the shares is high, for example a listed company. The prerequisite for implementing a group merger is that the transferee company is owned at least 90 % by the parent company or other group companies. Jo Rodin

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107

Norway

II. Public and private limited companies

In connection with a merger between a parent company and a wholly-owned subsidiary, there is no statutory requirement for discussion by the general meeting. The boards of directors of the companies may decide that the subsidiary’s assets, rights and liabilities are to be transferred and assigned to the parent company without consideration, cf. section 13-23 of ASL and section 13-24 of ASAL. The provisions in section 13-23 of ASL and section 13-24 of ASAL have the effect that the procedure for such mergers is considerably less complicated than for other types of mergers. Two limited liability companies which are wholly owned by the same parent company may merge in accordance with corresponding rules, with the exception that in the latter case the decision requires that a resolution be adopted at a general meeting, cf. section 13-24 of ASL. If at least one of the subsidiaries is an ASA, a simplified merger is not permitted. bb) Approval of the merger plan

107 The boards of directors of the merging companies must prepare a joint merger plan, cf. section 13-3. The merger plan must be approved by the general meeting of each of the merging companies by the same majority as is required for an amendment to the articles of association, i.e. by at least 2/3 of both the votes cast and the share capital represented at the general meeting, unless the articles of association stipulates more stringent requirements. cc)

Contents of the merger plan

In – – – – – –

accordance with section 13-6, the merger plan must include information about: the merging companies’ registered name; the date from which the merger will take effect in accounting terms; the consideration to be paid to the shareholders in the transferor company; the terms for exercising shareholder rights; any special rights for the shareholders; rights or advantages to be conferred on the board of directors or the general manager in connection with the merger; – a draft opening balance sheet with a declaration from the auditor that it has been prepared in accordance with the rules of the Accounting Act.

dd) Other merger documents

108 In a merger between AS companies, the transferee company’s articles of association, the most recent annual accounts, directors’ report and auditor’s report for the companies involved in the merger must be enclosed as appendices to the merger plan, cf. section 13-8 of ASL. In a merger between ASAs, the articles of association, annual accounts, directors’ report and auditor’s report for the past three financial years for the companies participating in the merger must be enclosed. In addition, interim balance sheets for the merging companies must be prepared and enclosed if the merger plan is signed more than six months after the end of the previous financial year, cf. section 13-8 of ASAL. When the merger plan has been completed, the board of directors of each company must prepare a report on the merger and what effect it will have on the company, cf. section 13-9. In an AS, information must be included on the main points of view in 654

Jo Rodin

14. Other important subjects

Norway

109

connection with determining the amount of the consideration and what effect the merger will have on the employees, cf. section 13-9 of ASL. In an ASA, the equivalent report must, as a minimum, contain the following, cf. section 13-9 of ASAL: – a legal and financial explanation of and reason for the merger; – a legal and financial explanation of and reason for the consideration to the shareholders in the transferor company; – mention of special difficulties in connection with determining the consideration; – a statement on the situation of the employees. The board of directors in each company must prepare a special statement, cf. section 1310. In an ASA, the requirement is an “expert statement”, as a general rule prepared by a state authorised or registered public accountant, cf. section 2-6 (2) and the description above in 2.d). In an AS, a statement by the board of directors suffices, confirmed by a state authorised or registered public accountant. ee)

Accounting

The accounting rules for mergers are not governed by the company legislation. The 109 rules are set out in the Accounting Act. It is prescribed that the accounting must reflect the financial realities of the merger. This means that mergers will normally be carried at the fair value of the transaction (often termed the acquisition method). Under the Companies Act of 1976, the values carried in the accounts of the transferor company were always to be retained in the balance sheet of the transferee company (often termed the continuity method). The continuity method will still be applicable where the merger is a uniting of approximately equal interests, or where the merger does not meet the criteria for a transaction to have taken place. The continuity method may also be applied between enterprises that are defined as small businesses in the Accounting Act. Whichever accounting method is applied, the consideration to the shareholders (conversion ratio) shall be based on the fair value of the assets to be transferred. ff)

Notification to the Register of Business Enterprises

An ASA must notify the Register of Business Enterprises of the merger plan no later 110 than one month before the general meeting is to consider the matter, cf. section 13-13 of ASAL. One month at the latest after the merger plan has been approved by the general meetings, the Register of Business Enterprises must be notified of the resolutions for both AS companies and ASAs, cf. section 13-13 of ASL and section 13-14 of ASAL. The Register of Business Enterprises must give public notice of the merger and notify the creditors of the company. The deadline within which the creditors must submit objections is two months. After this deadline and once the relations with the creditors have been settled, the transferee company must notify the Register of Business Enterprises that the merger is to become effective. gg) Scope of the rules on demergers ASL lays down rules on the demerger of an AS. The demerger of an ASA and the 111 demerger of an AS when the transferee company is an ASA are governed by ASAL, cf.

section 14-1. Jo Rodin

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112

Norway

II. Public and private limited companies

A demerger may be described as a situation in which the company’s assets, rights and liabilities are to be distributed between the company itself (the transferor company) and one or more transferee companies in return for the shareholders in the transferor company becoming shareholders in the transferor and/or transferee company(ies), cf. section 14-2. In addition to consideration in shares, the shareholders may receive other consideration (for example cash) which must not exceed 20 % of the total consideration. In a group of which the transferee company is a part, the consideration in shares may consist of shares in a group company. The board of directors of the company which is to be demerged must draw up a demerger plan, cf. section 14-4. The demerger plan is largely identical in content to a merger plan, cf. 10.c) above. In addition, the demerger plan must provide information about the distribution of the company’s assets, rights and liabilities and about the distribution of shares and other consideration. In connection with a transfer to an existing company, the boards of directors of the companies which are participating in the demerger must prepare a joint demerger plan. The statement describing the demerger plan must be confirmed by the auditor. Under the 1998 Accounting Act, the accounts must reflect the financial realities of the demerger. This implies that where a transaction has taken place (change of ownership) the demerger should be accounted for at fair values. Otherwise, the continuity method should be applied. The provisions on resolution, notification to the Register of Business Enterprises, rights in the transferor company and the distribution of assets and liabilities are generally similar to the corresponding provisions on mergers. hh) Tax consequences of mergers and demergers

112 The rules on tax-exempt mergers and demergers of AS companies and ASAs are set out in chapter 11 of the Tax Act of 1999. The rules entered into force on 1 January 1999. A merger may be exempted from tax when it takes place pursuant to the rules in ASL and ASAL, chapter 13 of both Acts. The tax exemption does not apply to mergers in which the transferee company is a subsidiary of a group and the consideration consists of shares in another subsidiary, cf. section 11-2 (1) of the Tax Act, cf. section 13-2 (2) of ASL and ASAL. Tax-exempt demergers of AS companies and ASAs may take place by: – the company which is to be split up forming a new company and transferring the operating unit to be hived off to the new company; – the company which is to be split up forming two or more new companies and transferring assets, rights and liabilities to these and thereafter being struck off the register

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14. Other important subjects

Norway

112

– the operating unit which is to be hived off being transferred to an already existing company in return for shares in the transferee company. A subsidiary cannot be demerged. If necessary, this must take place in accordance with the regulations on intra-group transfers of 13 May 1991.

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Poland Michał Lachert/Jacek Bondarewski/ Joanna Łysak/Agnieszka Szydlik

Table of contents I.

Limited liability company (Sp. z o.o.)

1. Character of the sp. z o.o. 2. Formation a) Formation procedure aa) Execution of the formation documents bb) Shareholder contributions and their payment prior to registration b) Registration procedure at the commercial register c) Approval requirements d) Shelf companies e) Cost and duration f) Requested information on business letters 3. The shareholder a) Rights and duties of a shareholder b) Shareholder resolutions/shareholder meetings 4. Shares in sp. z o.o. a) Classes of shares b) Transfer of shares c) Own shares 5. The Articles of Association a) Mandatory content aa) Company name bb) Registered office cc) Business objective dd) Share capital and amount of shareholder contributions b) Additional provisions of the articles of association c) Amendment of the articles of association

662 662 662 662 663 663 664 665 666 666 666 667 667 668 669 670 670 671 671 671 671 671 671

d) 6. a) b) c) d) 7. a) b) c) d) 8. a) b) c) 9. a) b) c) 10.

671 a) 672 672

b) 11.

aa) Formally recorded shareholder resolution bb) Registration with the commercial register Capital increase and decrease Management Board Members of the management board Management and representation Responsibilities and personal liability of members of the management board Other representatives of sp. z o.o. Supervisory Board Mandatory and optional supervisory board Composition and responsibilities Qualifications Consultative/advisory council Selected capitalization and liability questions concerning sp. z o.o. Prohibition of repayment of shareholder contributions Capital substituting loans Obligation to petition for insolvency proceedings Accounting Bookkeeping and annual financial statements (publication obligations) Audit requirements Disclosure Taxation (only general aspects of the tax treatment, in particular applicable taxes) Corporate Income Tax aa) Tax on Goods and Services (VAT) Other taxes Dissolution of a company/ termination of the business

Michał Lachert/Jacek Bondarewski/Joanna Łysak/Agnieszka Szydlik

672 672 673 673 673 674 674 675 676 676 676 676 677 677 677 677 678 678 678 682 682 683 683 684 686 687

659

Poland 12. Limited partnership with a sp. z o.o. as general partner a) Formation/constitution b) Transfer of partnership interest, participation of new partners, withdrawal of partners and dissolution c) Taxation/accounting

II. Joint stock company (S.A.) 1. Character of the S.A. 2. Formation a) Formation procedure aa) Execution of formation documents bb) Initial shareholder contributions and their payment prior to registration b) Registration procedure/ the commercial register c) Approval requirements d) Shelf companies e) Cost/duration f) Requested information on business letters 3. The shareholder a) Rights and duties of a shareholder b) Shareholder resolutions/shareholder meetings 4. Shares in S.A. a) Classes of shares b) Transfer of shares c) Own shares 5. The Statute a) Mandatory content aa) Company name bb) Registered office cc) Business objective dd) Share capital and amount of shareholder contributions b) Additional provisions of the statute c) Amendment of the statute aa) Formally recorded shareholder resolution bb) Registration with the commercial register d) Capital increase/decrease aa) Increase of share capital through company means

660

Table of contents

689 689

690 690 691 691 691 691 691

692

6. a) b) c) d) 7. a) b) c) 8.

692 693 693 693

a)

694 694 694

9. a)

696 698 698 699 700 701 701 702 702 702

b) c)

b) c) 10.

a) 702 702 703 703 703 704 705

b)

bb) Target capital cc) Conditional increase of company share capital dd) Decrease of company share capital Management Board Members of the management board Management and representation Responsibilities and personal liability of members of the management board Other representatives of a joint stock company Supervisory Board Mandatory/optional supervisory board Composition and responsibilities Qualifications Selected capitalization and liability questions Prohibition of repayment of shareholder contributions Capital substituting loans Obligation to petition for insolvency proceedings Accounting Bookkeeping and annual financial statements (publication obligations) aa) Bookkeeping bb) Annual financial statements cc) Simplified financial statement dd) Preparation, review, acceptance and announcement of joint stock company financial statements: Audit requirements Disclosure Taxation (only general aspects of the tax treatment, in particular applicable taxes) Corporate Income Tax aa) Tax-deductible costs bb) Utilisation of tax losses cc) Thin capitalization dd) Tax rates ee) CIT treatment of investments in real estate Tax on Goods and Services (VAT) aa) Subject of VAT taxation bb) Location of taxation

706 706 707 708 708 709 709 709 710 710 710 711 711 711 711 712 712 712 712 713 714

714 715 716

716 716 716 717 717 717 717 718 718 718

Index cc) VAT Registration dd) VAT rates c) Other taxes aa) Real estate tax

Poland 719 719 719 719

bb) Civil Law Activities Tax (“CLAT”) cc) Gambling Tax 11. Dissolution of a company/termination of the business

720 720 720

Index Amendment of Articles of Association (sp. z o.o.) 77-79 Amendment of Statutes (S.A.) 288-291, 251 Annual Financial Statement 122-126, 129 (sp. z o.o.) 356-360, 363 (S.A.) Articles of Association (sp. z o.o.) 6-7, 68-79 Audit Commitee (sp. z o.o.) 8, 108 -109 Bankruptcy 170(sp. z o.o.), 336, 348, 366, 401 (S.A.) Bookkeeping 115-137 (sp. z o.o.) 351-356 (S.A.) Business letters 34- 35 (sp. z o.o.) 227-229 (S.A.) Business objective 71 (sp. z o.o.) 283 (S.A.) Capital Increase 80-81, 83 (sp. z o.o.) 292-316 (S.A.) Capital Decrease 82-83 (sp. z o.o.) 317-322 (S.A.) Capital Substituting Loan 111 (sp. z o.o.) 347 (S.A.) Civil Law Activities Tax (CLAT) 162-165 (sp. z o.o.) 396-399 (S.A.) Classes of sheres 59 -61 (sp. z o.o.) 259-266 (S.A.) Company name 69 (sp. z o.o.) 227, 278, 281, 403 (S.A.) Corporate Income Tax (CIT) 138-150 (sp. z o.o.) 372-383 (S.A.) Court and Commercial Monitor 24 (sp. z o.o.) 214, 222, 278 (S.A.) Dissolution 167-182 (sp. z o.o.) 251, 282, 401-406 (S.A.) Dividend 37-39 (sp. z o.o.) 263, 264, 286, 295 (S.A.) Insolvency 112-113 (sp. z o.o.) 349 (S.A.) Limited Partnership 183-195 Liquidation 173-182 (sp. z o.o.) 402-411 (S.A.) List of shareholders (Sp. z o.o.) 10, 19

Management Board 8, 84-95 (sp. z o.o.) 243, 251, 255, 291, 304-307, 312, 319-331, 341, 348, 349, 353, 354, 360, 363 (S.A.) Management Board resolution 307, 319 (S.A) Members of management Board 87-88, 93- 94 (sp. z o.o.) 209-210, 231, 251, 277, 278, 323327, 330-333, 341, 343, 405 (S.A.) Mute shares (S.A.) 241, 264 National Court Register 22 (sp. z o.o.) 209, 221 (S.A.) Notification of a sp. z o.o. to the registry court 16 (sp. z o.o.) 209-214 (S.A.) Own shares 67 (sp. z o.o.) 234, 273-277 (S.A.) Proxy 96-179 (sp. z o.o.) 329, 334-336, 343, 408 (S.A.) Real Estate Tax 160-161 (sp. z o.o.) 394-395 (S.A.) Redemption of shares 75 (sp. z o.o.) 251, 273, 287, 317, 319 (S.A.) Registered office 70 (sp. z o.o.) 250, 278, 282, 352, 353 (S.A.) Registered shares (S.A.) 259-263, 268, 271272 (S.A.) Register of shareholders 230 (S.A.) Registration Fees 30-33 (sp. z o.o.) 222-225 (S.A.) Registration procedure 13-24, 29-33 (sp. z o.o.) 209-214 (S.A.) Reserve capital 234, 251, 274, 286, 301 (S.A.) Resolutions of Shareholders Meeting 46-47, 53-56 (sp. z o.o.) 241, 244-251 (S.A.) S.A. in organisation 201-202 Share Capital 72, 80-83 (sp. z o.o.) 196, 210, 229, 278, 284 (S.A.) Shareholder Contributions 12, 42, 57, 110 (sp. z o.o.) 196, 198-199, 205-207, 210, 262, 271, 284, 295, 299, 306, 346 (S.A.)

661

1

Poland

Shareholders Meeting 46-56 (sp. z o.o.) 244-251 (S.A.) Shares 57-67 (sp. z o.o.) 196, 198, 205-208, 252-278, 284, 287, 294 et seq. Shelf Company 27-28 (sp. z o.o.) 219-220 (S.A.) Simplified Finanacial Statement 127-128, 130 (sp. z o.o.) 361-362 (S.A.) Sole shareholder S.A. 212, 331 Sole shareholder sp z o.o. 3, 17 (sp. z o.o.) 196 (S.A.)

I. Limited liability company (Sp. z o.o.) Statutes (S.A.) 198-200, 216, 217, 236, 238, 239, 254, 263, 265, 268, 278-280, 283, 285-291, 305, 329 Supervisory Board 8, 101-105 (sp. z o.o.) 198, 290, 324, 330, 333, 338-345, 363 (S.A.) Sp. z o.o. in organization 11 (sp. z o.o.) Target capital (S.A.) 305-307 Transfer of Shares 62-66 (sp. z o.o.) 267-272 (S.A.)

I.

Limited liability company (Sp. z o.o.)

1.

Character of the sp. z o.o.

1 The limited liability company (sp. z o.o.) is the basic type of incorporated company in Poland. A sp. z o.o. has a separate legal personality from its shareholders, which means that acting through its governing bodies (mainly the management board) it may independently acquire rights and incur liabilities. A sp. z o.o. has company capital which is created from shareholders’ contributions. Shareholders of a sp. z o.o. are not liable for company’s liabilities. 2 Management of a sp. z o.o. is less formalised than of a joint stock company. It is therefore a significantly more popular form of conducting commercial activity in Poland than a joint stock company. 3 A sp. z o.o. may be formed by one or more persons. This means that a sole shareholder sp. z o.o. is permissible in Poland but such sole shareholder sp. z o.o. cannot establish another sole shareholder sp. z o.o. 4 A sp. z o.o. may be formed for any legally permissible purpose not only to conduct commercial activity, provided this is not prohibited by law.

2.

Formation

a)

Formation procedure

5 Formation of a sp. z o.o. is a several stage process including the following: (i) execution of the articles of association, (ii) shareholders making contributions to pay for the whole of the company share capital and if a share is to be taken up for a price exceeding the nominal value also contributing the surplus, (iii) appointment of a management board, 662

2. Formation

Poland

6

(iv) appointment of a supervisory board or audit committee if required by law or articles of association, (v) entry in the register. aa)

Execution of the formation documents

The main document required to form a company is the articles of association which 6 must contain the following: 1) name and registered office of the company, 2) subject of company activity, 3) amount of company share capital, 4) information whether a shareholder may have more than one share, 5) number and nominal value of shares taken up by each shareholder, 6) duration of the company if designated. The articles of association should be executed in the form of a notarial deed.

7

In addition, the founders may appoint persons to the governing bodies of the company, 8 the management board and, where required by law or provided for in the articles, supervisory board or audit committee in the notarial deed containing the articles of association. The resolution appointing members of these bodies may also be contained in a separate document. On registration of the sp. z o.o., a document containing a statement by all the members 9 of the management board is required confirming that contributions to cover the company share capital have been made by all the shareholders in full (as to contributions see comments in point bb) below). A list of shareholders signed by all members of the management board stating their 10 surnames and forenames or business names and number and nominal value of shares held by each, shall be submitted with the application to register the company. A sp. z o.o. in organisation comes into existence upon execution of the articles of 11 association. A sp. z o.o. in organisation has not legal personality but may appear independently in trade since it may, in its own name acquire rights, including ownership of real estate and other property rights, incur liabilities, sue and be sued. The company must use the words “in organisation” in trade. The sp. z o.o. in organisation becomes a sp. z o.o. and obtains legal personality upon registration and acquires all the rights and liabilities of a sp. z o.o. in organisation. bb) Shareholder contributions and their payment prior to registration

Before registering a sp. z o.o. shareholders are obliged to contribute the whole of the 12 company share capital. If the shares are taken up at a price exceeding the nominal value the shareholders must also contribute amounts exceeding the nominal value of shares taken up. Such provision excludes the possibility of partial delay of payment of contributions until after registration. The management board confirms the payment of the sums for the shares by all the shareholders provided for in the articles of association by making a relevant declaration. Such declaration is submitted together with other re663

13

Poland

I. Limited liability company (Sp. z o.o.)

gistration documents to the registry. In the event of an untrue statement members of the management board may be held liable on the basis of relevant provisions of the Polish Commercial Companies Code. b)

Registration procedure at the commercial register

13 Entry into the Register of Entrepreneurs at the National Court Register is required for a sp. z o. o. to come into existence. 14 The National Court Register is an IT data system on certain categories of entrepreneurs and other legal entities operating in Poland. It is kept by chosen district courts (known as registry courts). 15 The management board must notify the formation of the company to the registry court competent for the company’s registered office for the company to be entered in the register. All the members of the management board sign the motion to enter the company in the register. 16 The notification of the sp. z o.o. to the registry court should contain: 1) name, registered office and address of the company, 2) subject of company activity, 3) amount of company share capital, 4) whether a shareholder may have more than one share, 5) surnames, forenames and addresses of management board members and manner of representing the company, 6) surnames and forenames of the supervisory board members or audit committee members where appointment is required by law or articles of association, 7) where shareholders make non-monetary contributions, a note to that effect, 8) duration of the company, if designated, 9) where the articles of association provide for a specific paper in which company announcements are to be made – designation of this paper. 17 The application of a sole-shareholder company to the registry court should also contain the surname and forename or business name and the registered office and the address of the sole shareholder and also a note that he is the sole shareholder of the company. 18 The application should attach: 1) articles of association, 2) statement by all members of the management board that shareholders have contributed in full to pay up the company share capital, 3) where members of governing bodies are appointed otherwise than under the notarial deed containing the articles, proof of appointment, and specification of their composition. 19 In addition, the application should contain a list of shareholders signed by all the members of the management board, stating their surnames and forenames or business names and number and nominal value of shares held by each. 664

2. Formation

Poland

20

Specimen signatures, certified by a notary, of the members of the management board 20 should also be attached to the application. Where the application has been found flawed with a defect that is capable of being 21 removed, the registry court shall give the company in organisation a reasonable time in which to remove the defect otherwise it may refuse to register it. The registry court may not refuse to enter a company in the register for minor flaws that are not prejudicial to the interests of the company or to public interest but cannot be removed otherwise than at an unreasonably high cost. The management board must notify the formation of the company to the registry court 22 within six months from the date of execution of the articles of association. If this deadline is overrun the articles of association are dissolved. Furthermore, in the event of changes of data in the register, the management board is 23 obliged to submit the same to the registry court within 7 days from their existence. The registration of the sp. z o.o. and the data concerning the same should be published 24 in the Court and Commercial Monitor. This is a periodical which contains data concerning registered companies and changes in the companies. Furthermore, the company may choose an additional periodical in which such information is published. c)

Approval requirements

It is a general rule that it is not necessary to obtain a permit nor fulfil any specific 25 additional conditions envisaged for regulated activity for company formation and its activity. A sp. z o.o. may commence activity from the moment it is registered and even as a sp. z o.o. in organisation from the moment the articles of association are executed. There are certain exceptions to this rule, whereby a concession is required before commencing activity in a specific field. This includes the following: 1) exploration or identification of mineral deposits, extraction of minerals from deposits, the non-reservoir storage of substances and the storage of waste materials inside rock mass, including in underground mine workings; 2) production of and trade in explosive materials, armaments and ammunition, and also products and technologies for military or police purposes; 3) production, processing, storage, transfer and distribution of and trade in fuels and energy; 4) protection of persons and property; 5) dissemination of radio and television programmes; 6) air transport. Further activities regulated in specific laws not covered by this book shall be preceded 26 by obtaining respective consents.

665

27

Poland

d)

Shelf companies

I. Limited liability company (Sp. z o.o.)

27 In Poland “shelf companies” are not regulated in the Polish Commercial Companies Code as a specific type of company. 28 Even if the company does not conduct commercial activity, it is advisable to conduct a due diligence to determine its legal and financial status. e)

Cost and duration

29 The registration of a sp. z o.o. in the Register of Entrepreneurs of the National Court Register usually takes between two weeks and a month from the date all necessary documents are lodged. 30 Registry court costs amount to PLN 1,000 for court fees and PLN 500 for obligatory publication of the court’s decision in the Court and Commercial Monitor. 31 Apart from the court costs a significant part of the costs for forming the company are notarial fees. These depend on the value of the company share capital and are calculated as follows: share capital PLN 50,000-60,000: PLN 710 plus 1% of the surplus over PLN 30,000; share capital PLN 60,000-1 million: PLN 1,010 plus 0.5% of the surplus over PLN 60,000; share capital over PLN 1 million: PLN 5,710 plus 0.25% of the sum exceeding PLN 1 million, but no more than six times average monthly remuneration in the national economy, as announced by the Chairman of the Main Statistical Office (currently, the maximum fee is approx. PLN 12,000). 32 In addition the notary calculates and pays the civil legal transactional tax of 0.5% of the value of the company share capital reduced by the court fee and the fee for publication in the Court and Commercial Monitor. 33 Notary and court fees are subject to periodic change. Therefore it is advisable to confirm the fees with a notary. f)

Requested information on business letters

34 “Business letters” shall contain the following data: 1) name of the company, 2) registered office and address, 3) register number and indication of respective registration court.

666

3. The shareholder

Poland

35

The obligation to include the above data does not concern letters sent to persons 35 remaining in permanent contractual relationship with the company.

3.

The shareholder

a)

Rights and duties of a shareholder

Save as otherwise provided shareholders have equal rights and equal duties in the 36 company. The basic right of a shareholder is the right to participate in company profit – right to a 37 dividend. The shareholder has the right to demand payment of a dividend if the annual financial report indicates profit and such profit was earmarked for dividend by a shareholders’ meeting resolution. Save as otherwise provided by the articles of association the profit accruing to a shareholder corresponds to his share in the company share capital. Those shareholders, who were entitled to shares on the date the resolution on distribu- 38 tion of profit was adopted, are entitled to a dividend for a given financial year. The articles of association may authorise the shareholders meeting to determine another day on which the shareholders entitled to dividend for a given financial year is established (the dividend day). The articles of association may also authorise the management board to pay share- 39 holders an advance payment toward the expected end-of-financial-year dividend if the company has sufficient funds to make this payment. Shareholders also have other proprietary rights: the right to participate in liquidated 40 company assets, the right to remuneration for non-monetary benefits performed for the company and the right to demand reimbursement of additional payments, if such reimbursement is decided upon. Shareholders have the right to participate and vote at shareholders’ meetings, appeal 41 shareholders’ meeting resolutions and exercise control in relation to the company. In order to exercise the right of control, the shareholder or shareholder with an authorised person may review the company books and documents, draw up a balance sheet for his own use or demand explanations from the management board. This right may be excluded or restricted if a supervisory board or audit committee is appointed at the company. The principal obligation of each shareholder is to make a contribution to the company 42 share capital. Other obligations, if envisaged in the articles of association, may be different in kind. 43 The example of such is obliging shareholders to make additional payments (capital substituting loans).

667

44

Poland

I. Limited liability company (Sp. z o.o.)

44 The law or articles of association may provide exceptions from the principle of equality of rights and duties. The articles of association may privilege a shareholder by awarding him privileged shares or personal privileges or worsen his situation toward other shareholders e.g. by obliging him to provide recurring non-monetary benefits to the company. 45 Where the shareholder is obliged to provide recurring non-monetary benefits for the company, the articles of association should describe their kind and scope. The company shall pay the shareholders’ remuneration for these benefits even when its financial statements show no profit. Such remuneration may not exceed the prices or rates prevailing in trade. The principle resulting from the Polish Commercial Companies Code is that the company’s consent is required on a transfer of a share, its part or fraction thereof, or encumbering of a share connected with the obligation to provide non-monetary benefits. The articles may exclude the obligation to obtain consent. b)

Shareholder resolutions/shareholder meetings

46 Shareholder resolutions are adopted at shareholders’ meetings. Resolutions may be adopted without convening a meeting if all the shareholders consent in writing to the resolution or written voting. 47 Resolutions may also be adopted at shareholders’ meetings without being formally convened if the whole of the company share capital is represented and none of the persons present object to the meeting being held or specific matters being on the agenda. 48 Shareholders’ meetings are held at the company’s registered office. The articles of association may indicate another place in Poland for meetings to be held. If the articles do not indicate such other place, meetings can be held outside the registered office but in Poland, if all the shareholders consent to this in writing. 49 Shareholders’ meetings are either ordinary or extraordinary. 50 An ordinary shareholders’ meeting should be held within six months after the expiry of each financial year. The agenda of an ordinary shareholders’ meeting should include: 1) examination and approval of the management board report on company activity and financial report for the previous financial year, 2) adoption of a resolution on distribution of profit or coverage of losses, unless these matters have been excluded from the authority of the shareholders’ meeting, 3) granting members of the governing bodies of the company discharge for the fulfilment of their duties. 51 The extraordinary shareholders meeting is convened in the specific cases defined in the Polish Commercial Companies Code or articles of association, and also when the governing bodies or persons authorised to convene meetings deem advisable. 52 For example, shareholders’ resolutions shall be required for: 668

4. Shares in sp. z o.o.

Poland

53

1) decision concerning claims to redress damage inflicted on formation of the company or management or supervision, 2) transferring and leasing an enterprise or its organised part and establishing property rights thereon, 3) acquisition and sale of real estate, perpetual usufruct or share in real estate, save as otherwise provided for in the articles of association, 4) reimbursement of additional payments, 5) concluding a contract on management of subsidiary. Except where otherwise provided by the articles of association or the Polish Commer- 53 cial Companies Code, resolutions are adopted by an absolute majority of votes. Resolutions on amending the articles, dissolving the company or transferring an enterprise or an organised part thereof shall be adopted by a two-thirds majority of votes. A resolution on a material change of the subject of company activity requires the majority of three quarters of votes. The articles of association may determine more stringent conditions for adopting resolutions. Voting at shareholders’ meetings is open. Secret voting shall be ordered on elections 54 and on motions for dismissing members of governing bodies and liquidators, for proceeding against them as well as on personal matters. Secret voting shall also be ordered should at least one shareholder present or represented at the shareholders’ meeting so require. Resolutions of shareholders’ meeting should be entered into the minutes register and signed by those present or at least by the chairman and the person drawing up the minutes. A shareholders’ resolution that is contrary to the articles of association and good 55 practice and prejudicial to the interests of the company or intended to wrong a shareholder may be appealed against by means of an action against the company for revoking the resolution. If a shareholders’ resolution contravenes the law, authorised parties can submit a claim 56 against the company by requesting the court to declare a resolution void.

4.

Shares in sp. z o.o.

A shareholder in a sp. z o.o. may hold one or more shares. If a shareholder may hold 57 more than one share, then all the shares in the company share capital should be equal and indivisible. The shares may be taken over in exchange for monetary contributions or non-monetary contributions (in-kind). Payments for shares made by shareholders form the company share capital of the 58 company, which should constitute at least PLN 50,000. The nominal value of a share may not be less than PLN 50. Shares may not be taken up at less than their nominal value. If a share is taken up at a price higher than the nominal value, the excess is transferred to reserve capital.

669

59

Poland

a)

Classes of shares

I. Limited liability company (Sp. z o.o.)

59 In general, there are no specific classes of shares in a sp. z o.o. 60 However, some shares may be privileged. The Commercial Companies’ Code envisages the following methods of privileging shareholders: with respect to voting rights, rights to dividends or manner of participation in allocation of assets in case of company liquidation. Privileging with respect to voting rights may only apply to shares of equal nominal value. Privileging concerning voting rights may not grant the entitled person more than three votes for one share. For a share privileged with respect to dividends, an entitled person may be granted a dividend that does not exceed the dividend entitlement for non-privileged shares by more than a half. Shares privileged with respect to dividends do not carry a right of priority of satisfaction before remaining shares, unless the articles of association otherwise provide. 61 The creation of privileged shares must be envisaged by the articles of association. b)

Transfer of shares

62 The transfer of a share, its part or fraction thereof and also the pledging of a share should be in writing, with signatures certified by a notary. If a shareholder may hold only one share according to the articles of association, the articles of association may allow the transfer of part of a share. Shares smaller than PLN 50 may not be created as a result of the division of shares. 63 The transfer of a share, its part or fraction thereof and also the pledging of a share may in the articles of association be made dependent on the consent of the company or else limited in some other form. 64 In case of the death of a shareholder, shares in the company form part of the estate and may be inherited. The articles of association may however limit or exclude the accession to the company of heirs in place of the deceased shareholder. In such a case, the articles of association should specify the conditions for buying-out such heirs. 65 In case of the transfer of a share or its part, the transferee is jointly and severally liable before the company together with the transferor for non-performance of benefits due the company from the share transferred or part of a share transferred. 66 Interested parties inform the company of the assignment of a share, its part or a fraction thereof to another person. The management board is obliged to keep a share register, to which should be added the surname and first name, or company name, and registered address of each shareholder, number and nominal value of his shares, and also the establishing of a pledge or usufructury and the implementation of a voting right by a pledgee or usufructury, also all changes concerning the persons of the shareholders and the shares vested in them. The share register is open to inspection by shareholders. Moreover, after each entry of a change the management board presents the registry

670

5. The Articles of Association

Poland

67

court with a new list of shareholders signed by all the members of the management board. c)

Own shares

The general principle is that the company may not acquire or receive its own shares in 67 pledge. This ban also relates to the acquisition or receipt in pledge of shares by a subsidiary or cooperative. An exception is the acquisition through enforcement to satisfy company claims that cannot be satisfied from the shareholder’s other assets and also acquisition for the purposes of redemption of shares and purchase.

5.

The Articles of Association

a)

Mandatory content

The articles of association must include the following elements: 1) name and registered office of the company, 2) subject of company activity, 3) amount of company share capital, 4) information on whether a shareholder may possess more than one share, 5) number and nominal value of shares taken over by individual shareholders, 6) duration of company, if designated. aa)

68

Company name

A sp. z o.o. functions under any name with the suffix Spłka z ograniczona˛ odpowied- 69 zialnos´cia˛. (sp. z o.o.). The registry court should check upon registration whether the name selected by the company is distinct from other registered names. Moreover, use of a trade name that could mislead customers as to identity through use of a name, abbreviation, or other characteristic previously used by another entrepreneur is an act of unfair competition under Polish law. bb) Registered office

The registered office of a company must be specified in the articles of association and is 70 subject to submission to the Register of Entrepreneurs at the National Court Register. cc)

Business objective

The articles of association must specify the subject of company activity in accordance 71 with the Polish Activity Classification (PKD). A company cannot undertake activity beyond the scope of activity indicated in the articles of association. dd) Share capital and amount of shareholder contributions

The minimal level of company share capital is PLN 50,000. The nominal value cannot 72 be lower than PLN 50. Shareholders must pay in the entire company capital prior to registration of the sp. z o.o.

671

73

Poland

b)

Additional provisions of the articles of association

I. Limited liability company (Sp. z o.o.)

73 The articles of association may contain provisions other than those foreseen by law, if allowed by law, as well as additional provisions, unless the law provides full regulation or foresees additional provisions to be contrary to the nature of a company or good custom. 74 The articles of association may contain additional provisions, among others, those dealing with the following issues: – authorising the management board to pay shareholders advances against expected dividends at the end of a financial year, – granting personal rights to individually designated shareholders, – contractual compensation for failed or improper performance of regular benefits related to shareholding, – expansion of statutory rights of the supervisory board, regulation of the manner of appointing its members that differs from standard appointment by the shareholders’ meeting, – authorising the supervisory board to approve its regulations, – establishing funds to cover specific losses or expenses (reserve capital), – granting rights to call an extraordinary meeting of shareholders representing less than one tenth of company capital. 75 The ability to redeem shares may be provided for in the articles of association. Shares may be redeemed with a shareholder’s consent through their acquisition by the company (voluntary redemption) or without shareholder’s consent (mandatory redemption). The preconditions and course of mandatory redemption may be included in the articles of association; otherwise redemption of shares is not possible. 76 Moreover, the obligation to make additional payments is a mechanism whose use in a company depends on its inclusion in the articles of association. The articles of association in such an event must specify the maximum amount of additional payments through reference to the value of shares. c)

Amendment of the articles of association

77 An amendment of the articles of association requires a resolution of shareholders and entry in the register. A resolution on an amendment of the articles of association is passed with a two-thirds majority of votes. If the subject of amendment is a change of activity, the Polish Commercial Companies Code requires a three-quarters majority of votes. aa)

Formally recorded shareholder resolution

78 A resolution on an amendment of the articles of association should be drafted in the form of minutes by a notary and entered into the minutes register. bb) Registration with the commercial register

79 The management board must report the amendment of articles of association to the registry court within 7 days from the date of adopted resolution on such a change. 672

6. Management Board

Poland

80

Minutes containing a resolution to this effect as well as uniform text of the articles of association are attached to the motion on undertaken amendment filed at the registry court. d)

Capital increase and decrease

An increase of company share capital essentially takes place through an amendment of 80 the articles of association, unless the articles of association include a clause, whereby an increase of company share capital up to a certain maximum amount during a given period does not constitute its amendment. An increase of company share capital ensues through an increase of the nominal value of existing shares or the establishment of new shares. If the articles of association or resolution on increase of share capital do not provide otherwise, existing shareholders have the right of priority to assume new shares in the increased share capital in relation to their hitherto shareholding. Assumption of shares in increased share capital requires payment into company capital and the filing of a declaration on assumption in appropriate form. A shareholders’ resolution on an amendment of the articles of association can also 81 increase company share capital through allocation for this purpose of funds from reserve capital or funds set aside from company profits. This is so-called increase of company share capital through company means. In such an event, new shares are always accorded to shareholders in proportion to their shares held and do not require assumption. A decrease of company share capital also takes place through a resolution of the share- 82 holders’ meeting. A resolution on a decrease of company share capital should specify the level by which such capital is to be decreased as well as manner of decrease. Moreover, except for certain specific situations, a decrease of company share capital requires announcement of the decrease with simultaneous call upon company creditors to file opposition if they do not agree to this decrease. Creditor opposition does not prevent a decrease of company share capital, but merely obligates the company to satisfy or secure their claims prior to decrease. Both an increase and decrease of company share capital require entry in the registry 83 court and become effective at the moment of their entry in the register.

6.

Management Board

a)

Members of the management board

The management board is the sp. z o.o. body that manages and represents the company. 84 It may consist of one or more members, who may either be shareholders or not. Usually, management board members are appointed and recalled by a shareholders’ meeting resolution. The articles of association may foresee another manner of appointing and recalling management board members, e.g. supervisory board resolution.

673

85

Poland

I. Limited liability company (Sp. z o.o.)

85 Unless the articles of association stipulate otherwise, the mandate of a board member expires on the date of shareholders’ meeting approving the financial report for the first full financial year of management board member term. The term of office of board members may be one or more years. 86 The function of management board chairman may be entrusted to one management board member. The articles of association may also foresee that the management board chairman has the deciding vote in the event of a voting tie and may grant him specified rights within the scope of managing management board activities. 87 Only a natural person with full capability to undertake legal actions can serve as a management board member. 88 A management board member cannot, without company consent, deal with competing interests or participate in a competing company as a shareholder of a civil or private partnership or as a management board member of an incorporated company or participate in another competing legal entity as a management board member. This ban also covers shareholding in a competing incorporated company in the case of possession by a management board member of at least 10 % of shares or stock of such company, or the right to appoint at least one management board member. b)

Management and representation

89 The management board conducts company affairs and represents the company externally in relation to all company court and out of court activities. In particular, each management board member has the right to represent the company. This right cannot be effectively limited toward third parties. 90 If a management board consists of several persons, the articles of association establish the manner of representation. If the articles of association contain no clauses on this subject, the filing of declarations in the name of the company requires joint action by two management board members or one member together with a proxy. In turn, declarations filed with the company or deliveries of letters to the company may be undertaken through one management board member or proxy. 91 An exemption to the manner of company representation applies to the conclusion of an agreement between the company and a management board member, as well as to a dispute with him. In such cases, the supervisory board or a representative appointed by a shareholders’ meeting resolution represent the company. c)

Responsibilities and personal liability of members of the management board

92 As noted in point 6.b) above, the management is the company body responsible for conducting company affairs and its external representation in relation to all court and out-of-court matters. Unless the articles of association provide otherwise, according to the Polish Commercial Companies Code, each management board member has the right and duty to conduct company affairs and may, without a prior management board 674

6. Management Board

Poland

93

resolution, deal with matters not exceeding the scope of ordinary company activities. If, however, prior to dealing with a matter not exceeding the scope of ordinary management, any other management board member opposes this action or if the matter exceeds the scope of ordinary company activities, a prior management board resolution is required. Management board resolutions may be adopted if all members have been properly notified of management board meeting. Management board resolutions are passed with an absolute majority of votes cast. Management board members, similarly to shareholders, are not liable for company 93 obligations. An exception to this principle is personal joint liability of management board members with the company for company liabilities when enforcement against the company proves ineffective. Management board members may, however, release themselves from this liability if they prove one of the following circumstances: that they filed a timely motion to declare bankruptcy or if composition proceedings have been initiated, or failure to file a bankruptcy motion or lack of composition proceedings are not of their fault, or that a creditor did not incur harm from failure to file a motion to declare bankruptcy or lack of initiated composition proceedings. Moreover, management board members are jointly liable with the company toward 94 creditors in the event of intentional or negligent provision of false data in a declaration on full coverage of company share capital, which is filed upon incorporation of the company and during increase of company share capital. A management board member, similarly to a member of the supervisory board, audit 95 committee or liquidator, is liable toward the company for damage caused by an action or omission in violation of the law or provision of the articles of association, unless he is not at fault. d)

Other representatives of sp. z o.o.

A sp. z.o.o. may appoint proxies or representatives.

96

A proxy has authorization for court and out-of-court actions related to operation of an 97 enterprise. Its scope cannot be limited in effect toward third parties. However, certain actions may be undertaken by the proxy only after receipt of a separate power of attorney. A power of attorney, in turn, can be granted to carry out a particular type of action or one specific action. Sp. z o. o. proxies are disclosed at the registry court and, therefore, a contracting party 98 can verify whether a given person is authorized to act in the name of a company. Attorneys are not subject to entry in the registry court and, in their case, a review of a power of attorney document is necessary to determine whether a given person is entitled to represent a company. A proxy may be granted to several persons jointly (so-called joint proxy) or separately. 99 A proxy may be limited to matters entered in the enterprise branch register (so-called branch proxy). 675

100

Poland

I. Limited liability company (Sp. z o.o.)

100 Appointing a proxy requires consent of all management board members. Any management board member may at any time dismiss a proxy.

7.

Supervisory Board

a)

Mandatory and optional supervisory board

101 Company articles of association may establish a supervisory board or audit committee, or both. A supervisory board or audit committee should be established in companies where share capital exceeds PLN 500,000 and where there are more than 25 shareholders. b)

Composition and responsibilities

102 A supervisory board consists of at least three members appointed and dismissed by a shareholders’ resolution for one year. The articles of association may foresee another manner of appointment or recall of supervisory board members, as well as other duration of office, however, on the condition that supervisory board members may be dismissed at any time through a shareholders’ resolution. 103 The supervisory board exercises constant supervision of company activity in all areas. However, it has no right to issue binding orders to the management board concerning management of company affairs. Specific duties of the supervisory board include evaluation of financial and company activity reports within the scope of their conformance to books, documents, and actual status, as well as management board motions concerning the division of profit or coverage of losses. The supervisory board also files an annual written report to the shareholders’ meeting on its findings. The articles of association may expand the range of supervisory board rights. 104 In order to fulfil its duties, a supervisory board may review all company documents, demand reports and clarifications from the management board and employees, and conduct a check of company assets. Each supervisory board member may independently exercise the right to supervision, unless the articles of association provide otherwise. 105 A supervisory board issues decisions in the form of resolutions. Resolutions may be adopted if at least one half of members are present at meetings and all members have been invited. The articles of association may provide for stricter requirements concerning a supervisory board quorum. They may, moreover, foresee that, except for certain specific cases, supervisory board members may vote on resolutions in writing, through another member, or may participate in meetings by means of telecommunications. c)

Qualifications

106 The Polish Commercial Companies Code does not foresee any specific requirements concerning supervisory board member qualifications. However, it contains limitations on the ability to combine functions within the company, thus a management board 676

8. Selected capitalization and liability questions concerning sp. z o.o.

Poland

107

member, proxy, liquidator, branch or enterprise manager or hired chief accountant, legal advisor or attorney cannot also serve as a member of the supervisory board or audit committee. d)

Consultative/advisory council

There are no specific consultative/advisory council in sp. z o.o.

107

An audit committee can be established alternatively to the supervisory board or jointly 108 with this board. An audit committee is comprised of at least three members who are appointed and dismissed on the same principles as supervisory board members. Among the supervisory board powers accorded to an audit committee are an evaluation 109 of financial and company activity reports as well as management board motions concerning the division of profit or coverage of loss, together with the filing of an annual written report to the shareholders’ meeting on the results of this evaluation. This is carried out in the manner and scope specified for such activities on the part of the supervisory board. In a company lacking a supervisory board, the articles of association may broaden audit committee duties.

8.

Selected capitalization and liability questions concerning sp. z o.o.

a)

Prohibition of repayment of shareholder contributions

In accordance with the principle of protecting company share capital, contributions 110 made by shareholders cannot be returned, either in full or partially, throughout duration of the company. Moreover, shareholders cannot receive any payout from company assets on any basis, which is needed to fully cover share capital. A shareholder, who in violation of the law or provisions of the articles of association, receives such a payment must reimburse it. Members of company bodies, who bear responsibility for such a payment, are jointly liable with the recipient for its reimbursement to the company. b)

Capital substituting loans

If envisaged in the articles of association, shareholders may be obliged to make addi- 111 tional payments (capital substituting loans). In such case, the articles of association must define the maximum amount of additional payments by referring to the value of the shares. Additional payments should be imposed and paid by shareholders in equal proportion to their shares. A shareholders’ resolution specifies the amount and date for making the additional payments. Additional payments may be reimbursed by the company by the date specified by the shareholders’ resolution. This usually happens when the company has funds to reimburse the additional payments incurred and if the additional payments are not required to cover the losses.

677

112

Poland

c)

Obligation to petition for insolvency proceedings

I. Limited liability company (Sp. z o.o.)

112 In accordance with the Bankruptcy and Recovery Law Act of 28 February 2003, the management board is obligated, no later than within two weeks from the date when grounds arose to declare bankruptcy, to file a motion in court for declaration of bankruptcy. 113 Such a reason is company insolvency. Insolvency means failure to fulfil obligations or a situation when the value of company liabilities exceeds the value of its assets even if a company meets ongoing liabilities. In the event of failure of the management board to file a timely motion in court for declaration of bankruptcy, it is liable for damages resulting from such negligence.

9.

Accounting

114 The Accounting Act,1 Corporate Income Tax Act2 (“CIT Law”), and Polish Commercial Companies Code set the principles of bookkeeping and financial reporting at sp. z o.o. a)

Bookkeeping and annual financial statements (publication obligations)

Bookkeeping 115 Limited liability companies active in Poland must maintain accounting records and other documentation on the basis of principles set forth in the Accounting Act, which covers, among others: – accepted principles (policy) of bookkeeping, – maintenance, on the basis of accounting records, company books containing entries of events in chronological and systematic order, – periodic determination or verification through an inventory check of the actual status of assets and liabilities, – assessment of assets and liabilities as well as determination of financial results, – preparation of financial statements, – collection and storage of bookkeeping records and other documentation provided by law, – review and announcement of financial statement under circumstances foreseen by law. 116 Company books should be maintained at the registered office of an sp. z o.o. Companies with units (enterprise) may maintain books of branches (enterprises) at the registered office of unit or branch (enterprise).

1 2

678

Act dated 29 September 1994 (Journal of Laws, 2002, no. 76 pos. 694 as amended). Act dated 15 February 1992 (Journal of Laws, 2000, no. 54 pos. 654 as amended).

9. Accounting

Poland

117

If a company entrusts bookkeeping to an entity entitled to render such services (e.g. an 117 accounting firm), these books may be maintained within the territory of Poland outside the registered company office. In such a case, the head of a unit, which in the case of an sp. z o.o. is the management 118 board, must notify the appropriate tax office of the location of bookkeeping within 15 days from the date of issue of books outside the company registered office (branch or enterprise). The management board is, moreover, obligated to ensure access to books for review by authorized external audit bodies at the registered office of unit (branch, enterprise). A management board is liable for carrying out the bookkeeping duties of a unit. It is also 119 liable when these obligations are entrusted to another party. If the management board is multi-person and no individual is held responsible, liability for carrying out duties of a unit in relation to bookkeeping is shared by all management board members. Management board liability is excluded only within the scope of carrying out an 120 inventory in the form of a list. Failure to fulfill duties stemming from the Accounting Act by obligated parties subjects 121 them to criminal liability, e.g.: – failure to maintain books, their improper maintenance, failure to prepare a financial statement or its improper preparation are subject to a fine or imprisonment up to two years or both. Persons responsible for preparing a financial statement, who fail to do so or prepare it in violation of the Accounting Act or include false data in such statement are subject to a fine or imprisonment up to two years or both, – failure to provide the annual financial statement required by the Accounting Act to an auditor for review, failure to publicly announce the annual financial statement or file it at the court register or failure to provide access to the financial statement and other documents for inspection by authorized entities are all subject to a fine or restriction of freedom. Annual financial statements A financial statement is prepared for the date of closing books, thus, for the date when a 122 financial year concludes, the date of concluded activity, also including the sale and completion of liquidation or bankruptcy proceedings, as well as the preceding a change of legal form or decision on the state of liquidation or bankruptcy – but no later than within three months from the date of these events. A financial statement consists of the following: 1) balance sheet, 2) profit /loss statement, 3) additional information introducing the financial statement as well as supplements and explanations.

123

679

124

Poland

I. Limited liability company (Sp. z o.o.)

124 A financial statement should be drafted according to templates constituting annexes to the Accounting Act as well as in the Polish language with denomination in Polish currency. 125 A financial statement of entities requiring an annual audit includes a list of changes in capital (funds). 126 The management board attaches a report on its activity during the financial year in an annual financial statement of an sp. z o.o. Simplified financial statement 127 Smaller firms may prepare a simplified financial statement. In order to file a statement in this form, a company cannot reach two of the following three sizes during a financial year: 1) average annual full-time employment is less than 50 persons, 2) the sum of balance sheet assets at the end of the financial year in Polish currency has not exceeded the equivalent of EUR 2,000,000, 3) net revenues from the sale of goods and financial operations have not exceeded the Polish currency equivalent of EUR 4,000,000. 128 Additional information is prepared in appropriate simplified form. Preparation, review, acceptance and announcement of sp. z o.o. financial statements: 129 Limited liability companies must meet the following annual reporting requirements: 1) Preparation by the management board of a financial statement and report on activity together with supplemental documents – within 3 months from the balance sheet date. A financial statement is signed and dated by the person entrusted to maintain company books as well as the management board, and if an entity is managed collectively, by all members of such body. A refusal to sign requires written justification attached to a financial statement. 2) Presentation by the management board of the financial statement and report on activity together with supplemental documents to the Ordinary Shareholders’ Meeting of an sp. z o.o., in accordance with laws binding upon the company, as well as provisions of statutes or the articles of association – within 3 months from the balance sheet date. 3) Filing at an appropriate tax office of a declaration of income (loss) attained during a given tax year – by the end of the third month of the following year. The company must pay tax due by the same deadline or the difference between tax due on income indicated in the declaration and the sum of paid tax advances for the period since the start of the year. 4) Selection by the company of an entity authorized to audit the financial statements (“auditor”). Information on requirements affecting firms that are obligated to audit financial statements is contained in point 9.b).

680

9. Accounting

Poland

130

5) Audit of financial statement by an auditor, which should take place and be completed between the date of financial statement drafted by the management board and the date 15 days prior to the Shareholders’ Meeting, which is to approval the statement. 6) Adoption of resolution by the supervisory board (if one exists) on evaluation of the company financial statement from the standpoint of its conformance to books and documents, as well as to the factual status and conclusions of management board concerning division of profit. The supervisory board presents this evaluation to the Ordinary Shareholders’ Meeting. The supervisory board issues a report upon receipt of annual statement together with opinion of auditor no later than 15 days before the Ordinary Shareholders’ Meeting that is to approve the statement. 7) Access of shareholders to the annual financial statement and report on activity; if such financial statement is subject to mandatory audit, also the opinion and report of auditor – no later than 15 days prior to the Ordinary Shareholders’ Meeting. 8) Convention of an Ordinary Shareholders’ Meeting on the subject of approval of the annual financial statement, auditor opinion and supervisory board report – within 6 months of the balance sheet date. 9) Submission of the annual sp. z o.o. financial statement at the relevant tax office within 10 days from the date of approval, together with a copy of Ordinary Shareholders’ Meeting resolution approving the financial statement. Those companies required to subject the financial statement to an audit by an entity authorized to audit financial statements also present a report of auditor opinion and report to the relevant tax office by the same deadline. 10) Placement of announcement in Monitor Polski Dział “B” containing the financial statement and extract of Ordinary Shareholders’ Meeting resolution approving the statement, as well as auditor opinion for companies required to audit the financial statement – submission for publication should take place within 15 days from the date of held Ordinary Shareholders’ Meeting, 11) Submission of the following by the management board at the relevant court register within 15 days from the date of approval of annual financial statement by the Shareholders’ Meeting: – annual financial statement, – auditor opinion if the financial statement was subject to audit, – copy of Ordinary Shareholders’ Meeting resolution on approval of annual financial statement and on division of profit or coverage of loss, – report on company activity. In the event of a company filing a simplified financial statement, the management 130 board, instead of the auditor opinion, submits information to the court register on the type of such opinion together with indication of whether it contains additional explanations.

681

131

Poland

b)

Audit requirements

I. Limited liability company (Sp. z o.o.)

131 The Accounting Act states that in the case of limited liability companies continuing their activity, an audit and announcement of financial statement apply to those firms that in the preceding financial year for which a financial statement has been prepared, must meet at least two of the following conditions: a) average annual full-time employment was at least 50 persons, b) the sum of balance sheet assets at the end of the financial year was at least the Polish currency equivalent of EUR 2,500,000, c) net revenues from sale of goods and financial operations for the financial year constituted at least the Polish currency equivalent of EUR 5,000,000. 132 Companies placed under bankruptcy or liquidation are not covered by the mandatory requirement of financial statement audit. 133 In the event of company merger, financial statements of acquiring firms as well as newly created companies, which are prepared for the financial year during which a merger took place, are subject to review. c)

Disclosure

134 Financial statements of limited liability companies, which are subject to audit of their financial statements, must be publicly disclosed if they meet statutory conditions discussed in point 9.2. 135 The company management board must submit the following documents for announcement within 15 days from the date of their approval: – introduction to the financial statement constituting the part of additional information, – balance sheet, – profit /loss account, – list of changes in capital, – cash flow statement for the financial year, – opinion of auditor, – resolution or decision of body approving the financial statement as well as division of profit or coverage of loss, – report on company activity. 136 Companies preparing a simplified financial statement present information in place of the auditor opinion on the type of such opinion and indication of whether it contains additional explanations. 137 Announcements are made in the official journal “Monitor Polski B”.

682

10. Taxation (only general aspects of the tax treatment, in particular applicable taxes)

Poland

138

10. Taxation (only general aspects of the tax treatment, in particular applicable taxes) a)

Corporate Income Tax

According to CIT Law, a limited liability company with its legal office or place of 138 management in Poland (Company) is taxed on all of its income in Poland, irrespective of the source of such income. The Company and its shareholder(s) are taxed separately. CIT is payable on the total taxable income earned from any source during a tax year. Taxable income is the difference between revenues earned by the Company in a tax year and tax-deductible costs, irrespective of the source. When costs exceed the total amount of revenue, the difference constitutes a loss. The tax year, as a rule, is a calendar year or any 12 consecutive months, if so chosen by a 139 taxpayer. Tax-deductible costs All costs and expenditures incurred to obtain taxable revenues, except those specified 140 in the CIT Law, should be treated as tax-deductible costs. Utilisation of tax losses The Company has a right to carry forward losses incurred in a tax year by deducting 141 such losses in various increments over the next five-year period. Deduction in one tax year, however, may not exceed 50 % of the tax loss carried forward from each year. Thin capitalization When using loans from shareholders and group companies as a method of financing, 142 Polish thin capitalisation rules must be observed in order not to trigger restrictions in deductibility of interest paid under loan agreements. The CIT Law restricts financing through loans and credits granted by a so-called “qualified lenders”, e.g. a company holding at least 25% of debtor shares. If the debt to equity ratio exceeds 3 to 1, part of the interest on restricted loans is not tax-deductible. Tax rates Taxable income earned by the Company in a given tax year is, as of 1 January 2004, 143 subject to a flat 19% CIT rate. Also, capital gains are generally taxed at the standard 19% flat CIT rate. Interest and royalties received by non-resident companies are subject to a 20 % with- 144 holding tax, unless an applicable tax treaty provides otherwise. Dividend income and other participation in profits of the Company are subject to a 19% 145 withholding tax unless a relevant double tax treaty provides otherwise. The payer of the dividend withholds this tax at source. However, in order to apply the withholding tax rate on dividends, interest or royalties 146 provided by a given double tax treaty, it is necessary to obtain a certificate substantiat683

147

Poland

I. Limited liability company (Sp. z o.o.)

ing relevant tax residence of beneficiary receiving dividends, interest or royalties concerned. 147 In light of Polish accession to the EU, Poland is to implement the EU Parent-Subsidiary Directive. According to the CIT Law, Directive relief will be available to dividends payable to companies having their office in an EU Member State if they hold at least 25% of shares of the Polish subsidiary for an uninterrupted period of at least 2 years. 148 As for royalties and interest, Poland is entitled under EU laws to an eight-year transitional period commencing as of 1 January 2005. During this period Poland is entitled to apply withholding tax to interest and royalties paid by a Polish company to its related EU company with the rate not exceeding (1) 10 % for the first four years, and (2) 5% for the last four years of the transitional period. This regulation is without prejudice to provisions of relevant double tax treaties, if treaties provide for lower rates. CIT treatment of investments in real estate 149 Among costs specifically mentioned in the CIT Law as not being tax-deductible are expenditures on acquisition or creation of fixed assets (e.g. buildings and constructions).

150 Expenditures on acquisition or creation of fixed assets (e.g. buildings and constructions) become tax-deductible costs only through depreciation write-offs. Thus, where an investment meets the CIT Law definition of a fixed asset, its investment costs should be generally recognised over time through depreciation deductions on the initial value of the fixed asset. Expenditures on acquisition of land become tax-deductible at the moment of disposal of land. aa) Tax on Goods and Services (VAT)

151 As of 1 May 2004, VAT taxation regulations in Poland have been based on the VI Directive. 3 For this reason, it is basically similar to VAT regulations of other EU countries. Subject of VAT taxation 152 Under the Act on Goods and Services Tax4 (“VAT Law”) VAT applies to the following transactions: – supply of goods and services made in Poland for consideration. The supply of goods includes the hand over by a taxpayer of business-related goods for nonbusiness related purposes, e.g. donations. However, the supply of samples and small gifts is not subject to VAT, – exportation of goods outside the EU, – importation of goods from outside the EU, – intra – Community acquisition of goods effected for consideration in Poland, inclusive of the movement of goods between different Member States within the same business,

3 4

684

Official Journal L 145, 13/06/1977 P. 0001-0040. Act of 11 March 2004 (Journal of Laws 2004 No 54 pos. 535).

10. Taxation (only general aspects of the tax treatment, in particular applicable taxes)

Poland

153

– intra – Community supply of goods inclusive of the movement of goods between different Member States within the same business. Location of taxation Determination of the location of supply is crucial in determining of the location of VAT 153 taxation. As for the supply of goods, the location is considered the following: – the location where goods are at the time of dispatch or transport to the purchaser, – the location of installation or assembly, – the location where goods are at the time of delivery (when not dispatched or transported), – the location where passenger transport begins – as regards the delivery of goods by ship, airplane or train, – the country of importation. The location for intra – Community acquisition is, in principle, the location where 154 transport or dispatch ends. The location of supply of services is, in principle, the location where the supplier has his 155 registered office or fixed place of business, or place of residence. However, there are special rules determining the supply of, inter alia: – intangible services, e.g. consultancy, advertising, electronic etc. – the location of supply is assigned to the location of establishment of customer provided that the customer is a taxpayer established in the EU or any entity established in a third country, – services connected with immovable property – the location of supply where the property is situated, – transportation services – the location of supply is the place where transport takes place with regard to distances covered. VAT Registration

A Company must be registered as a VAT taxpayer prior to execution of the first 156 operation that makes it subject to Polish VAT. In order to be registered as a VAT taxpayer, it must file an application for registration with the relevant authority. It is then registered as an active taxpayer or exempt taxpayer. For intra-Community transactions, the entity should be registered as a VAT UE taxpayer 157 and an application must be made. After registration for VAT UE, a taxpayer is under the obligation to use that VAT number in intra-Community transactions. Taxpayers whose net amount of taxable sales did not exceed EUR 10,000 in the previous 158 year are exempt from VAT. However, taxpayers are entitled to elect not to use the exemption if they notify the relevant tax office of their intent.

685

159

Poland

I. Limited liability company (Sp. z o.o.)

VAT rates 159 At present, the standard VAT rate is 22%. This rate applies to all supplies of goods and services not qualifying for one of the reduced rates or exemptions. There are reduced VAT rates, i.e. 7%, 3%, 0% (exemption with credit according to European VAT nomenclature). Certain activities are exempt.

b)

Other taxes

Real estate tax 160 Real estate tax is levied on business entities if they are owners or freeholders of property as well as on those that are dependent holders or administrators of property belonging to the state when this tenure of land results from a legal agreement. This includes buildings, constructions used for business purposes and land not subject to agriculture tax. Local councils determine tax rates. 161 As of 1 January 2004, these rates determined by local councils cannot exceed PLN 17.42 per square meter for buildings used for business purposes, PLN 0.63 per square meter for land used for business purposes and 2% of the value of constructions fixed for depreciation purposes. The rates set by local councils may not be lower than 50 % of the rates cited above. Civil Law Activities Tax (‘‘CLAT’’) 162 CLAT, formerly “stamp duty”, is a transfer tax applicable on civil law transactions including, but not limited to: contracts on the sale of assets and property rights, loan agreements and articles of association. The sale of real estate and perpetual usufruct of land and movables is generally subject to a 2% tax. The sale of certain property rights (e.g. sale of shares) is taxed at the rate of 1%. As a rule, CLAT is not due when VAT applies. 163 In case of Company incorporation, CLAT on Company articles of association is levied at the rate of 0.5% of Company share capital. 164 Loan agreements are generally subject to a 2% tax, although certain exemptions and preferential rates apply. Loans granted by a shareholder to a limited liability company (e.g. the Company) are exempt from CLAT. 165 Increases of share capital as well as additional payments to share capital are subject to 0.5% CLAT of the amount of increase or amount of additional payment made to share capital. Gambling Tax 166 Gambling tax is imposed on companies conducting gaming activities. The tax depends on the type of game and value of turnover ranging from 10 % for rattles to 45% for slot machine games.

686

11. Dissolution of a company/termination of the business

Poland 167

11. Dissolution of a company/termination of the business According to the Polish Commercial Companies Code, dissolution of a company is 167 caused by: 1) reasons foreseen in the articles of association, 2) a shareholders’ resolution on dissolution of company or on transfer of its registered office abroad, 3) declaration of company bankruptcy, 4) other reasons foreseen by law. Re 1) Reasons foreseen in the articles of association. The articles of association may be concluded for a specified time period or may foresee 168 company dissolution upon attainment of a specified goal. Re 2) Shareholders’ resolution on dissolution of company or on transfer of company office abroad. Sp. z o.o. can be dissolved on the basis of the shareholders’ resolution. The Polish 169 Commercial Companies Code obligates immediately calling of a shareholders’ meeting for the purpose of adopting a resolution on the further existence of the company if the balance sheet prepared by the management board reveals losses exceeding the sum of reserve capital as well as one-half of company share capital. In the event of an adopted resolution on company dissolution or transfer of its registered office abroad, such a resolution must be issued in the form of minutes drafted by a notary. Re 3) Announcement of company bankruptcy. A court declares bankruptcy of a company in the event of fulfilment of specific pre- 170 conditions from the Bankruptcy and Recovery Law Act of 28 February 2003 (see point 8. c) above). In the event of bankruptcy, a bankruptcy procedure set forth by this law is applied instead of liquidation procedures provided by the Polish Commercial Companies Code. Re 4) Other causes provided by law. These may include instances of company transformation such as merger, division or 171 creation of a new company. In addition to causes noted above, a court may declare dissolution of a company through 172 a ruling: 1) upon demand of a shareholder or member of a company body if the achievement of company aim has become impossible or if other vital reasons caused by company relations arose, 2) upon demand of state body if illegal company activity threatens the public interest.

687

173

Poland

I. Limited liability company (Sp. z o.o.)

173 A standard liquidation procedure takes place in the manner described below. In practice, however, exceptions from this model are possible. 174 Commencement of liquidation takes place on the date of issue of a legally valid court decision on company dissolution, adoption by shareholders of a resolution on company dissolution, or the appearance of other reasons for dissolution. Liquidators report the following to a registry court: commencement of liquidation, names of liquidators and their addresses, manner of company representation by liquidators and all changes made in this connection. Management board members serve as liquidators, unless the articles of association or a shareholders’ resolution state otherwise. 175 Liquidation takes place under the company name with the added designation “in liquidation”. During liquidation the company maintains its legal personality and profits, even in part, cannot be disbursed or assets allocated among shareholders prior to payment of all liabilities. 176 Liquidators should announce dissolution of company and commencement of liquidation by calling upon all creditors to report their claims within three months from the date of such announcement. 177 Liquidators prepare a balance sheet on commenced liquidation, which is presented to the shareholders’ meeting for approval. 178 The task of liquidators is conclusion of ongoing company affairs, collection of receivables, satisfaction of liabilities and disposal of company assets. They may initiate new business only if necessary to conclude a pending matter. Real estate may be disposed of through a public auction or independently, but in the latter manner only on the basis of a shareholders’ resolution and at a price not lower than that set by shareholders. 179 Commenced liquidation results in expiration of a proxy. No proxy may be established during the liquidation period. 180 A division among shareholders of assets remaining after satisfaction or securing of creditors cannot take place before six months from the date of announced commencement of liquidation and summons to creditors. 181 Following approval by the shareholders’ meeting of a financial report for the date preceding the division among shareholders of assets remaining after satisfaction or securing or creditors (liquidation report) and upon conclusion of liquidation, liquidators should announce this report at their registered office and file it with the registry court together with simultaneous filing of motion for deletion of the company from the register. 182 A company is dissolved after liquidation at the moment of its deletion from the registry.

688

12. Limited partnership with a sp. z o.o. as general partner

Poland

183

12. Limited partnership with a sp. z o.o. as general partner A limited partnership with shareholding of a limited liability company functions under 183 regulations of Commercial Companies Code provisions on limited partnerships. In a limited partnership, the company has unlimited liability with all its assets for 184 liabilities to creditors where at least one shareholder is liable toward the company’s creditors without limitation (complementor), and the liability of at least one shareholder (limited partner) is limited. A limited partnership has no legal personality, but it may however, acquire rights and assume liabilities, file suit and be sued, and is an independent entity in civil-legal relations. The shareholding of a limited liability company (sp. z o.o.) as complementary allows 185 limitation of the liability of sp. z o.o. shareholders to the contributed sum, and the liability of limited partner to the amount of limited partner share. The Commercial Companies Code allows both natural and legal persons (including a 186 limited liability company) to act as shareholders in a limited partnership. In a typical limited partnership with sp. z o.o. shareholding, the complementor repre- 187 sents the company. He acts through his management board. A limited partner may represent the company solely on the basis of a power of attorney. A limited partner neither has the right nor duty to conduct company affairs. The consent of limited partner is required in matters exceeding the scope of ordinary business, but shareholders may deem otherwise in the company articles of association. a)

Formation /constitution

The formation of a company takes place through conclusion of limited partnership 188 articles of association. These must contain at least two entities: a limited liability company as complementor and a natural or legal person as limited partner. Limited partnership articles of association should be drafted in the form of a notary deed 189 and include: – the name and registered office of the company, the name of a limited partnership should include the name of one or more complementors and additional designation “limited partnership”. If the complementor if a legal person, the company name should include the full name of such person in its proper form with the additional designation “limited partnership”. The abbreviation “sp.k.” may be used in commerce. The surname of limited partner cannot be in the company name. Otherwise, this limited partner will be liable toward third parties as complementor, – subject of company activity, It is necessary for the subject of activity to be presented in accordance with the Polish Activity Classification. It should be noted here that the limited liability company that is to be the complementor in the company should consider participation in a limited partnership within the scope of its own activity, 689

190

Poland

I. Limited liability company (Sp. z o.o.)

– duration of company, if indicated, – indication of contributions from each shareholder and their value, – numerically stated extent of liability of each limited partner toward creditors (limited partner share). 190 A limited partnership arises at the moment of entry in the National Court Register. Persons who acted in the name of the company after its creation and prior to entry are jointly liable for company liabilities. 191 Shareholder contributions may be made in monetary form or in-kind. A limited partner contribution cannot be an obligation to perform work or provide a service to the company, or be remuneration for services during creation of company. b)

Transfer of partnership interest, participation of new partners, withdrawal of partners and dissolution

192 Entire rights and obligations of a limited partnership shareholder may be transferred to another person only when provided by company articles of association and only upon receipt of written consent of all remaining shareholders, unless the articles of association stipulate otherwise. In the event of transfer of all rights and obligations of a shareholder to another person, the withdrawing and acceding shareholders are jointly liable for liabilities of the withdrawing shareholder related to participation in a company of a personal nature as well as the liabilities of such personal company. 193 A limited partnership shareholder may leave the company by providing written notice six months before the end of the financial year if articles of association are concluded for an unspecified time period. The company shall continue to exist between remaining shareholders if the company articles of association or remaining shareholders so decide. Withdrawal from the company by the sole complementor or limited partner will cause its dissolution. c)

Taxation/accounting

194 Natural persons assuming the status in the company of limited partner are taxed on principles applying to natural persons. As in other partnership, the same income cannot be taxed twice – once as income of partner, and again as company income. Due to the lack of legal personality, a limited partnership is not subject to corporate income tax. This company, however, may be subject to excise tax and VAT and pay ZUS contributions. A limited liability company being a complementor pays corporate income tax on income earned through shareholding in a limited partnership. 195 The lower taxation of income of shareholders in a limited partnership makes it attractive in comparison to capital companies. In the case of capital companies (joint stock company or limited liability company) a dividend paid to a shareholder constitutes income of such shareholder subject to personal income taxation. It is paid to share/ stock holder from net company profit, thus after corporate income taxation of the

690

1. Character of the S.A.

Poland

196

company. This income is therefore subject to dual taxation: once through corporate income tax and another time as personal income tax levied on shareholders.

II. Joint stock company (S.A.) 1.

Character of the S.A.

One or more persons may establish a joint stock company for any purpose. A single 196 person limited liability company, however, cannot establish a joint stock company. A joint stock company has legal personality from the moment of entry in the register and is liable for its obligations solely with its own assets. Company share capital created from shareholder contributions is divided into shares. Shareholders are not liable for company liabilities. In principle, a joint stock company has the form of a capital company. In practice, 197 however, joint stock company statutes are encountered that contain privileges for shareholders in light of their character (e.g. the State Treasury in companies created through privatization).

2.

Formation

a)

Formation procedure

aa)

Execution of formation documents

In order to create a joint stock company, its statutes as well as management and super- 198 visory boards must be established, shares must be assumed and contributions made for coverage of company share capital. Joint stock company statutes should be drafted in the form of a notary deed and signed 199 by all founders. Founders also prepare a written report on non-monetary contributions if such are foreseen. Moreover, founders and other parties who are to become shareholders file a statement in 200 the form of a notary deed in which they express consent to creation of a joint stock company, the assumption of shares and the wording of statutes (founding of company). A joint stock company under organization is established at the moment of company 201 founding. A joint stock company in organisation has no legal personality, but may appear independently in trade since it may, in its own name acquire rights, incur liabilities, sue or be sued. Upon registration a joint stock company acquires all rights and liabilities of a joint stock 202 company in organisation.

691

203

Poland

II. Joint stock company (S.A.)

203 The notary deed should also establish management and supervisory boards. The founders most often create these bodies. 204 Founders may, but are not obligated, to become company shareholders. They act until the moment of management board appointment and are jointly liable together with other persons who acted in the name of the company prior to its registration. bb) Initial shareholder contributions and their payment prior to registration

205 Shares may be assumed in return for monetary and non-monetary contributions. Shares assumed for non-monetary contributions should be covered in full no later than one year after company registration. 206 Shares assumed for monetary contributions should be paid for prior to company registration in at least one-quarter of the nominal value. 207 In any event, if shares are assumed solely for non-monetary contributions or for both monetary and non-monetary contributions, capital should be covered prior to registration in at least one-quarter of it lowest legally allowed value, which is PLN 125,000. 208 Payments for shares must be made directly or through a brokerage to the account of company under organization maintained at a bank in Poland. b)

Registration procedure/the commercial register

209 A motion for registration of the company in the Register of Entrepreneurs at the National Court Register must be signed by all management board members and filed at the registry court with jurisdiction for the company registered office. 210 A – – –

motion is drafted on application forms with the following attached: statutes, notary deeds on founding of company and assumption of shares, declaration of all management board members that required payments for shares and non-monetary contributions have been made in accordance with the law; if the statutes foresee or minimum or maximum level of company share capital, the declaration should specify the level of assumed capital; however, if the statutes foresee coverage of capital through non-monetary contributions after registration, the declaration should also state that these contributions to the company are assured in accordance with the statutes within one year of company registration, – proof of payment for shares confirmed by a bank or brokerage house, – document declaring establishment of company bodies with specification of their personal composition, – specimen signatures of management board members executed in court or authenticated by a notary,

211 If required for establishment of company, a permit or proof of approval of statutes by relevant public authorities should also be presented.

692

2. Formation

Poland

212

The reporting of a single person company should also include the surname and first 212 name, or company name, as well as address of its sole shareholder together with a declaration that this is the sole shareholder. The joint stock company obtains a legal personality at the moment of its entry into the 213 register. The registration of a joint stock company and data concerning the same should be 214 published in the Court and Commercial Monitor. c)

Approval requirements

Only a joint stock company may conduct activity in certain sectors. This requirement 215 concerns, e.g. insurance, commodity markets, investment funds, pension funds or activity pertaining to games of chance and monetary lotteries as well as numerous other sectors. A series of laws specifically regulate the composition of joint stock companies estab- 216 lished to conduct activity in certain sectors and require statutes of such companies or candidates for their managerial bodies to be approved by state monitoring bodies. For example, the statutes of an insurance firm require approval, prior to registration, 217 from the Insurance and Pension Fund Monitoring Commission, as do statutes of a company intending to conduct activity relating to number games and monetary lotteries, which must be approval by the Minister of Finance. Moreover, provisions concerning concessions that are required, for example, for ex- 218 ploration of mineral deposits or production, processing and distribution of fuels and energy apply to joint stock companies. d)

Shelf companies

In Poland “shelf companies” are not regulated in the Polish Commercial Companies 219 Code as a specific type of company. Even if the company does not conduct commercial activity, it should conduct a due 220 diligence to determine the legal and financial status of the company. e)

Cost/duration

The registration of a company in the Register of Entrepreneurs of the National Court 221 Register usually takes from two weeks to a month from the date of filing all necessary documents. Registration court costs amount to PLN 1,000 for court fees and PLN 500 for mandatory 222 publication of the court’s decision in the Court and Commercial Monitor.

693

223

Poland

II. Joint stock company (S.A.)

223 In addition to cost costs, a sizable part of costs of creating a joint stock company consists of notary fees. They depend on the value of company share capital and are calculated in the following manner: share capital PLN 60,000-1 million:

PLN 1,010 plus 0.5% of sum exceeding PLN

60,000; share capital over PLN 1 million:

PLN 5,710 plus 0.25% of the sum exceeding PLN 1 million, but no more than six times aver-

age monthly remuneration in the national economy, as announced by the Chairman of the Main Statistical Office (currently, the maximum fee is approx. PLN 13,000). 224 Moreover, the notary fee is 1/10 of the fee calculated in the above manner for declarations of consent of persons acceding to a joint stock company to its formation, to the wording of statutes and to assumption of shares, as expressed in a deed other than the deed containing the statutes. 225 Notary and court fees are subject to periodic change. Therefore, it is advisable to confirm the fees with a notary at the time of company incorporation. 226 Additionally, the notary collects a civil transactions tax in the amount of 0.5% of the value of company share capital decreased by the court fee and fee for announcement in the Court and Commercial Monitor. f)

Requested information on business letters

227 Company letters and commercial orders directed to a designated party must include: 1) company name, its registered office and address, 2) designation of registry court and number under which the company is entered into the register (KRS number). 228 This obligation does not concern letters or commercial orders directed to parties having permanent commercial relations with the firm. 229 If the company reveals data on its capital in correspondence, it should indicate the level of share capital as well as the total amount of paid in contributions.

3.

The shareholder

a)

Rights and duties of a shareholder

230 In relation to the company, a shareholder is deemed to be only that person, who is entered in the register of shareholders maintained by the management board or holder of bearer shares. In accordance with general principles, shareholders should be 694

3. The shareholder

Poland

231

treated equally under the same circumstances (principle of equal rights and obligations). Shareholders may participate in a shareholders’ meeting and exercise their right to vote 231 personally or through attorneys. Powers of attorney should be issued in writing under the penalty of invalidity and management board members or company employees may not act as attorneys at a shareholders’ meeting. A shareholder may not, either personally or through an attorney, or as an attorney for 232 another party, vote on resolutions concerning his liability toward the company on whatever grounds, or on acknowledgement of fulfilled duties, release from liability toward the company or on a dispute between him and the company. Shareholders have the right to a share in profit indicated in a financial statement 233 reviewed by an expert auditor, which has been allocated by the shareholders’ meeting for distribution among shareholders. Profit is divided in relation to the number of shares. If shares are not fully covered, profit is distributed in proportion to payment made per share. The amount allocated toward distribution among shareholders cannot exceed profit for 234 the last financial year increased by undistributed profits from previous years as well as amounts transferred from reserve capital that may be used for payout of dividends. This amount should be reduced by uncovered losses, own shares and amounts that, in accordance with the law or statutes, should be allocated from profit from the last financial year toward reserve capital. Those parties entitled to dividends for a given financial year are shareholders holding 235 shares on the date of adopted resolution on distribution of profit. Statutes may authorize the shareholders’ meeting to specify the date upon which a list is 236 established of shareholders entitled to dividends for a given financial year (dividend date). The dividend date cannot be set later than within two months of the date of adopted resolution on profit distribution. Shareholders who, in violation of the law or statutes, received any benefits from a 237 company are obligated to reimburse them. An exception is receipt by a shareholder in good faith of a share in profit. Management or supervisory board members who bear liability for undertaking improper benefits are jointly liable with the recipient for their reimbursement. Statutes may grant an individually designated shareholder personal rights. In particular, 238 these may concern the right to appoint or dismiss management or supervisory board members. Personal shareholder rights are not disposable and expire at the latest on the date when an entitled party ceased to be a company shareholder. A shareholder or shareholders representing at least one tenth of company share capital 239 may demand the calling of a shareholders’ meeting, as well as the placing of specific 695

240

Poland

II. Joint stock company (S.A.)

matters on the agenda of the next shareholder’s meeting. Statutes may grant rights to shareholders representing less than one tenth of company share capital to call a shareholders’ meeting. 240 Shareholders may review a book of minutes and demand issue of resolution extracts authenticated by the management board. 241 A shareholder who voted against a resolution and demanded a record of his opposition (the voting requirements does not apply to the holder of mute shares) following its adoption, a shareholder unjustly prevented from participation in a shareholders’ meeting, and a shareholder not present at a shareholders’ meeting (in the event of an erroneous calling of a shareholders’ meeting or adoption of a resolution on a matter not on the agenda) all have the right to file suit to overrule a shareholders’ meeting resolution that contracts statutes or good custom as well as adversely affect the company interest or aims to harm shareholders. 242 If the resolution is contrary to the law a claim to declare invalidity of the resolution may be filed. 243 A shareholder may during shareholders’ meeting proceedings demand information from the management board concerning the company if this is justified to assess matters covered by the meeting agenda. The management board is obligated to grant it, unless disclosure of such information could harm the company or its affiliate or subsidiary, in particular, through revelation of technical, trade or enterprise organizational secrets, as well as in the situation when this could threaten a management board member with criminal, civil or administrative liability. A shareholder denied any information during a shareholders’ meeting and who filed opposition in its minutes may file a motion with the registry court to obligate the management board to furnish this information. b)

Shareholder resolutions/shareholder meetings

244 Shareholders’ meetings are either ordinary or extraordinary. 245 An ordinary shareholders’ meeting should take place within six months after the end of each financial year. The subject of such meeting should be: – review and approval of the management report on company activity as well as review of the financial statement for the previous financial year, – adoption of a resolution on distribution of profit or coverage of loss, – acknowledgement of fulfilment of duties on the part of company bodies. 246 An ordinary shareholders’ meeting is called in cases specified by law or in statutes, as well as when bodies or parties entitled to call shareholder meeting deem it necessary. 247 If, in accordance with the Commercial Companies Code, a shareholders’ meeting resolution is required for a company to carry out legal actions, those actions carried out without such a resolution are void.

696

3. The shareholder

Poland

248

Resolutions may be adopted, despite a lack of formal calling of shareholders’ meeting, if 248 the entire share capital is represented and no one present objects to the holding of shareholders’ meeting or the entry of specific matters onto its agenda. Resolutions adopted in such a manner, with the exception of resolutions subject to entry in the register, should be announced within one month. Shareholder meeting resolutions should be included in minutes drafted by a notary. The 249 minutes should declare the propriety of calling a shareholder meeting and its capability to adopt a resolution, list adopted resolutions, as well as the number of votes cast in favor and against each resolution. An attendance list with signatures of shareholder meeting participants should be attached to the minutes. The management board should also attach proof of called shareholder meeting to the book of minutes. A shareholders’ meeting takes place at the company’s registered office. A shareholders’ 250 meeting of a public company may also take place at the location of stock market where its shares are traded. Statutes may include separate provisions concerning location of a shareholders’ meeting. However, a shareholders’ meeting can only take place within the territory of the Republic of Poland. The sole authority of a shareholders’ meeting include, in addition to matters being the 251 subject of an ordinary shareholder’s meeting, for example: – adoption of a resolution on redemption of shares, – adoption of a resolution on a reduction of company share capital, – dismissal or suspension in duties of a management board member, irrespective of which entity appointed him to the management board, – adoption of a resolution consenting to actions by the company management board in the event of denial of required consent on the part of the supervisory board, – adoption of provisions concerning claims for reparation of damage caused during founding of company or its management or supervision, – adoption of a resolution on the disposal or lease of enterprise or its organized part as well as the establishment upon them of limited rights in property, – adoption of a resolution on acquisition and disposal of real estate, perpetual usufruct, or share in real estate, unless statutes constitute otherwise, – adoption of a resolution on issue by the company of convertible bonds with a right of priority and emission of subscription options, – adoption of a resolution on further existence of the company if its balance sheet prepared by the management board shows losses exceeding the sum of reserve capital as well as one third of share capital, – adoption of a resolution on an amendment of company statutes, increase of share capital, denial to shareholders the right of subscription of shares in full or in part, – adoption of a resolution on dissolution of company or transfer of its registered office abroad, – adoption of a resolution on merger, division or transformation of company.

697

252

4.

Poland

II. Joint stock company (S.A.)

Shares in S.A.

252 In accordance with the Commercial Companies Code, a share document must be issued in writing and contain the following data: – name, registered office and address of company, – designation of registry court and KRS number under which the company is entered into the register, – date of company registration and issue of shares, – nominal value of shares, series and number, type of share data and specific rights accorded by a given share, – restrictions on share use, – statutes provisions regarding obligations toward the company related to a share, – in the case of registered shares, the level of undertaken payment. 253 A share document should bear a company stamp and signature of management board (according to the principle of representation, whereby a signature may be placed by mechanical means). 254 Statutes may include additional provisions concerning the content of share document and its form. 255 A shareholder acquires a claim for issue of a share document after one month from the date of company registration. The management board is obligated to issue the share document within one week from the date of claim filed by a shareholder. 256 Shares are indivisible. They may be issued in collective blocks. 257 Shares of companies allowed for public trade are subject to dematerialization. 258 The disposal of a share prior to entry of the company in the register or prior to an increase of company capital is void. a)

Classes of shares

259 Shares may be registered or bearer shares. 260 Only registered shares can be privileged shares. 261 Bearer shares may be issued only upon full payment. 262 An exchange of registered shares to bearer shares and vice-versa, in principle, can take place upon demand of shareholder. However, in certain situations the company may issue only registered shares: – when a share related to regular monetary benefits, – when shares have been assumed in exchange for a non-monetary contribution they must remain registered until the date of approval by the next shareholders’

698

4. Shares in S.A.

Poland

263

meeting of financial statement for the financial year during which coverage of these shares took place. Specific rights associated with privileges shares (registered) must be specified in the 263 statutes. A privilege can, in particular, affect the right of vote (with the exception of public companies), the right to dividend or division of assets in the event of company liquidation. One share cannot be accorded more than two votes. Privilege within the scope of dividend cannot cause a dividend paid from a privilege 264 share to exceed more than one-half a dividend allocated toward payment to nonprivileged shareholders. This limitation does not apply to so-called mute shares for which dividend privileges may be greater. Yet, such shares possess no right of vote. Statutes may make the granting of specific rights dependent on provision of additional 265 benefits to the company, on a deadline or on fulfilment of a condition. A shareholder may exercise special rights granted to him that relate to privileged shares 266 after conclusion of the financial year during which he contributed in full toward coverage of company share capital. b)

Transfer of shares

Shares are disposable.

267

Statutes may make the sale of registered shares dependant on company consent (which 268 should be granted or denied in writing by the management board under penalty of invalidity, unless statutes foresee otherwise) or in another manner limit the possibility of using registered shares. Moreover, it is possible to conclude an agreement limiting transfer of shares for a 269 specified time period that is not longer than five years from conclusion of agreement. Agreements establishing the right of first purchase or another right of priority to acquire 270 shares are also allowed. Limitations on use stemming from such agreement cannot last longer than ten years from the date of agreement conclusion. If registered shares have been assumed in exchange for a non-monetary contribution, 271 they cannot be sold or pledge until the date of approval by the next shareholders’ meeting of the financial statement for the financial year during which coverage of these shares took place (this does not pertain the public companies shares and shares issued in case of the merger of the companies). The shares are transferred through an appropriate agreement and actual issue of the 272 share document. The transfer of the registered shares shall be evidenced on the document of he share or on the separate document.

699

273

c)

Poland

II. Joint stock company (S.A.)

Own shares

273 A company cannot acquire its own issued shares. This ban does not affect: 1) acquisition of shares for the purpose of securing the company against a direct threat of serious harm, 2) acquisition of shares that are to be offered for acquisition by employees or persons that were employed at the company or its affiliated for a period of at least three years, 3) acquisition of shares through universal succession, 4) a financial institution that for consideration acquires fully covered shares through another account for the purpose of their subsequent re-sale, 5) acquisition of shares for the purpose of their redemption, 6) acquisition of fully covered shares through enforcement for the purpose of satisfying company claims that could not have been satisfied in another manner from shareholder assets, 7) free-of-charge acquisition of fully covered shares, 8) a financial institution that acquires shares through its own account for the purpose of their subsequent re-sale within bounds of authorization granted by a shareholders’ meeting for a period not longer than one year; however, a financial institution cannot possess own shares acquired on this basis with a total nominal value exceeding 5% of company share capital, 9) the merger of companies; in order to enable assumption of shares by shareholders of taken over company, a company may acquire its own shares with a total nominal value not exceeding 10 % of company share capital, 10) the event of company division, if shareholders demand a buyout of their shares due to the fact that the division plan foresees assumption by shareholders of the divided company of shares or stock in the acquiring company or company newly created on terms less favorable than those of the divided company, the acquiring or newly created company may, upon division, acquire its own shares or stock at a total value not exceeding 10 % of company share capital. 274 In instances specified in points 1, 2 and 8 a company is allowed to acquire its own shares only when the following conditions have been jointly met: 1) the acquired shares have been fully covered, 2) the total nominal value of acquired shares does not exceed 10% of company share capital, which also takes into consideration the nominal value of remaining own shares that have not been disposed of by the company, 3) the total price for acquisition of own shares increased by the costs of their acquisition is not higher than reserve capital established for this purpose, but also only to the certain amount. 275 Regulations on the ban on acquisition of own shares are respectively applied toward the acquisition of own shares of a dominant company by an affiliated company or cooperative. This also applied to persons acting through their own account.

700

5. The Statute

Poland

276

The acquisition of a company’s own shares by a third party acting on the company 276 account is allowed if the company is also entitled to acquire these shares in accordance with principles governing the acquisition of own shares. A company cannot assume its own shares. This ban also concerns assumption of com- 277 pany shares by an affiliated company or cooperative. The assumption of shares in violation of regulations banning such assumption is valid. In such an event, management board members are jointly liable with the party assuming shares for the full contribution, unless they are not culpable.

5.

The Statute

a)

Mandatory content

Company statutes must specify: – the name and registered office of company, – subject of company activity, – company duration, if specified, – level of company share capital and amount paid in to cover share capital prior to registration, – nominal value of shares and their number with indication of whether shares are registered or bearer shares, – if various types of shares are to be introduced, the number of shares of a specific type and their related rights, – names of individual or corporate founders, – number of supervisory and management board members, or at least the minimum and maximum number of members of these bodies, as well as the entity entitled to establish the composition of the management board, – letter for announcement if the company intends to issue announcements elsewhere than in the Court and Commercial Monitor

278

Statutes should also include, under penalty of ineffectiveness toward the company, 279 provisions concerning: – the number and type participation rights to profit or division of assets in the event of company liquidation, as well as their related rights, – all obligations toward the company related to shares other than the obligation to pay for shares, – terms and manner of share redemption, – limitations on share disposal, – personal rights granted to shareholders (e.g. the right to appoint or dismissal management board members), – at least an estimated value of all expenses incurred or encumbering the company in connection with its founding.

701

280

Poland

II. Joint stock company (S.A.)

280 Statutes may include provisions other than those provided by the Polish Commercial Companies Code if the Code allows so, as well as additional provisions if they do not contradict the nature of the joint stock company or good custom. aa)

Company name

281 A company functions under any name with the suffix Spłka Akcyjna. (S.A.). The registration court should verify during registration whether the name selected by the company is distinct from other registered names. Moreover, it is an act of unfair competition under Polish law to use a trade name that may mislead customers as to an identity by using a name, abbreviation, or other characteristic previously used by another entrepreneur. bb) Registered office

282 The registered company office must be specified in statutes. A joint stock company may have only one registered office, which is subject to notification at the Register of Entrepreneurs of the National Court Register. The registered office should be at the territory of Poland. A joint stock company cannot select a registered office outside Poland, because this constitutes a reason for its dissolution. cc)

Business objective

283 In accordance with jurisprudence by the Polish Supreme Court, statutes should specify at least the type of conducted commercial activity. However, in light of the need to report the subject of activity to the Register of Entrepreneurs according to the Polish Activity Classification, it is recommended that a subject of activity entered in statutes also be specified in accordance with the Polish Activity Classification. dd) Share capital and amount of shareholder contributions

284 Share capital of a joint stock company must be at least PLN 500,000, whereby the nominal value of shares cannot be smaller than PLN 0.01. b)

Additional provisions of the statute

285 Statutes may contain provisions other than those provided by law if allowed by law, as well as additional provisions, unless the law demonstrates sufficient regulation or if additional statute provisions contravene the nature of a joint stock company or good custom. 286 Statutes may contain additional provisions, among others, on the following issues: – authorization to the management board for an advance payment to shareholders of dividend foreseen for the end of a financial year, – granting of personal rights to individually designated shareholders, – another manner of profit division than in relation to number of shares, – provision, whereby a shareholder entitled by a mute share, who has not been paid a dividend for a given financial year in full or in part, is entitled to compensation from profits in subsequent years, but no later than within three subsequent financial years,

702

5. The Statute

Poland

287

– expansion of statutory rights of the supervisory boards, regulation of the manner of appointing its members that differs from that foresee by the Code, – authorization to the supervisory board to adopt its regulations, – establishment of capital to cover specific losses or expenses (reserve capital), – granting of rights to call an extraordinary shareholders’ meeting to shareholders representing less than one tenth of company share capital, Moreover, if not foreseen in statutes, company shares cannot be redeemed. Shares may 287 be redeemed with consent of a shareholder through their acquisition by the company (voluntary redemption) or without consent of shareholder (forced redemption). The conditions and manner of forced redemption must be set forth in statutes. c)

Amendment of the statute

aa)

Formally recorded shareholder resolution

An amendment of statutes requires a shareholders’ meeting resolution and entry in 288 the register. A resolution on amendment of statutes is adopted, in principle, by a three-fourth majority of votes cast. However, in some instances the Code foresees even tighter restrictions for resolutions amending statutes. For example, a resolution concerning an amendment of statutes that increases duties of shareholders or curbs personally granted rights to specific shareholders requires consent of all shareholders concerned. In order to adopt a resolution on a vital change of company activity, a two-thirds 289 majority of votes cast is required. In the case of voting on a vital change of company activity, each share has one vote without privileges or limitations and a resolution should be adopted through open and registered voting as well as announced. However, the effectiveness of a resolution depends on purchase of shares from those shareholders who do not agree to the change. After each amendment, a uniform text of the statutes should be drafted and filed at the 290 register. A shareholders’ meeting may authorize the supervisory board to draft a uniform text of the amended statutes or introduce other amendments of an editorial nature that are specified in the meeting resolution. bb) Registration with the commercial register

The management board is obligated to report an amendment of statutes to the registry 291 court, in principle, within three months from the date of resolution adopted by a shareholders’ meeting. An exception concerns notification about a resolution on an increase or decrease of company share capital for which the management board has six months. The change of the statute is effective as from the date of its registration.

703

292

d)

Poland

II. Joint stock company (S.A.)

Capital increase/decrease

292 An increase of share capital, in principle, requires an amendment of statutes and takes place through a creation of new shares or increase in existing nominal value of shares. Regulations on target capital and conditional increase of share capital foresee certain exceptions from these principles. 293 An increase of share capital may be undertaken only after full pay in of at least 9/10 of existing share capital, unless an increase is undertaken within the scope of company merger. 294 The assumption of new shares may take place through: 1) private subscription (offering of shares by the company and its acceptance by a designated addressee, whereby acceptance of the offer takes place in writing under the penalty of invalidity), 2) closed subscription (offering of shares solely to shareholders enjoying the right of subscription), 3) open subscription (offering of shares through an announcement directed to persons not enjoying the right of subscription). 295 A share capital increase resolution should include: 1) the sum by which share capital is to be increased, 2) designation of whether the shares are registered or bearer shares, 3) specific rights, if such rights are granted by the resolution for newly issued shares, 4) issue price for new shares or authorization to management or supervisory board to set the issue price, 5) date from which new shares are to participate in dividends, 6) dates for opening and closing of subscription or authorization granted to the management or supervisory board to set these dates, or date of company concluding an agreement on assumption of shares through a private subscription, 7) the subject of non-monetary contributions and their appraisal, as well as persons having the right to assume shares for such contributions together with indication of the number of shares to be allocated to each of them if the shares are to be assumed through non-monetary contributions. 296 Moreover, a resolution on increase of share capital should indicate the date according to which shareholders are specified who are accorded to right of subscription to new shares (date of subscription right), if they have not been deprived of this right in full. The date of the right of subscription cannot be set later than after three months starting from the date of resolution adoption. 297 Shareholders have the right of priority to new shares in relation to the number of shares held (right of subscription). A shareholders’ meeting may, in the interest of the company, deprive shareholders of the right of subscription in full or in part.

704

5. The Statute

Poland

298

A shareholders’ meeting resolution in such an event requires a majority of at least 4/5 of 298 vote and deprivation of shareholders of the right of share subscription must be announced in the agenda of the shareholders’ meeting. The management board presents the shareholders’ meeting a written opinion justifying the reasons to withdraw the right of subscription and proposed share issue price or method of its setting. These requirements do not apply if: 1) the share capital increase resolution states that new shares are to be assumed in full by a financial institution (sub-issuer) together with obligation to subsequently offer them to shareholders to enable them to exercise the right of subscription on terms set forth in the resolution, 2) the resolution states that new shares are to be assumed by the sub-issuer in the event when shareholders entitled to the right of subscription do not assume some or all of the offered shares. The assumption of shares by the sub-issuer may take place only in exchange for mone- 299 tary contributions. The management board should offer shares, for which shareholders enjoy the right of 300 subscription, through an announcement, unless all existing shares in the company are registered shares. In such a case, information on the right of subscription must be sent by registered mail. aa)

Increase of share capital through company means

A shareholders’ meeting may increase share capital by allocating means toward this end 301 from reserve funds created from profit, if they may be utilized for this purpose (increase of share capital from company means), as well as from reserve capital established from a reduction in share capital, reserve capital created from profit that, according to statutes may be allocated toward division among shareholders, as well as spare capital. However, such a part of capital must remain, which may be allocated toward division, that corresponds to uncovered losses and own shares. A resolution on share capital increase from company funds may be adopted if an 302 approved financial statement for the previous financial year shows losses and an expert auditor opinion contains no reservations concerning the financial situation of the company. If the last financial statement is prepared for a balance sheet date falling at least six months from the date of shareholders’ meeting at which adoption of such resolution is foreseen, the expert auditor selected to review the company financial statement or another auditor selected by the supervisory board reviews a new balance sheet and profit /loss account together with additional information, which should be presented at this meeting. New shares that should be distributed to shareholders on the basis of a shareholders’ 303 meeting resolution do not require assumption. Shares allocated through an increase of share capital from company means are due to shareholders in proportion to their existing shareholding in company share capital.

705

304

Poland

II. Joint stock company (S.A.)

304 The management board reports an increase of share capital to the registration court. An increase of share capital takes place at the moment of entry in the register. bb) Target capital

305 Statutes may authorize the management board to increase share capital to a specific amount during a period not longer than three years. The management board may carry out this authorization through one or more share capital increases within the bounds of target capital, which cannot exceed of company capital as of the date of authorization granted to the management board (target capital). 306 Management board authorization to increase share capital may be granted for successive periods, but not longer than for three years. Granted authorization requires an amendment of statutes. The management board may issue shares only in exchange for monetary contributions, unless an authorization for increase of share capital foresees the ability to cover shares with non-monetary contributions. A management board authorization to increase capital cannot cover rights to increase capital from a company’s own means. The management board cannot issue privileged shares or grant personal rights to individual shareholders. 307 A management board resolution adopted within the bounds of statutory authorization in the form of a notary deed replaces a shareholders’ meeting resolution on increase of share capital. In principle, the management board decides on all matters relating to a share capital increase, unless an authorization granted to the management board contains other provisions or if absolutely binding regulations exist. cc)

Conditional increase of company share capital

308 A shareholders’ meeting may resolve to increase share capital on the condition that persons granted the right to assume shares exercise it on terms specified in a resolution with consideration of the below-presented principles (conditional increase of share capital). 309 A resolution on conditional increase of share capital may be undertaken to: 1) grant the right to assume shares by holders of convertible bonds or bonds with the right of priority, or 2) grant rights to assume shares on the part of employees, or members of the management or supervisory boards in exchange for non-monetary contributions constituting amounts due to them from acquired rights to participate in profits of the company or subsidiary, or 3) grant rights to assume shares by holders of subscription warrants. 310 The nominal value of a conditional increase of share capital cannot exceed twice the level of share capital at the moment of resolution adoption. 311 A resolution on conditional increase of share capital should specify, in particular: 1) the nominal value of conditional share capital increase, 2) purpose of conditional share capital increase,

706

5. The Statute

Poland

312

3) deadline for exercise of share assumption rights, 4) specification of persons entitled to assumption of shares. The management board notifies the registration court of the conditional share capital 312 increase. A resolution on conditional share capital increase should be announced by the management board no later than within six weeks from the date of entry of conditional share capital increase in the register. Persons entitled to assume shares, who are specified in the shareholders’ meeting re- 313 solution, assume shares of a conditional share capital increase through a written statement on forms presented by the company. Following registration of a conditional share capital increase the management issues 314 share documents based on the increase resolution to shareholders who has paid in fully. In public trade, the issue of share documents is replaced by an entry in the securities account with consideration of regulations governing public trade in securities. Acquisition of rights from shares and increase of company share capital in an amount 315 equal to the nominal value of shares covered by a conditional share capital increase resolution takes place together with issue of share documents. Within thirty days after the end of each calendar year the management board provides the registration court with a list of shares covered in a given year in order to update the company capital entry. Also, a public company management board files within one week after the end of each successive month counting from the date of issuing the first share document. A company may issue registered or bearer securities toward target and conditional 316 increase of share capital, which entitle their owners to sign up for or assume shares, excluding the right of subscription (subscription warrant). dd) Decrease of company share capital

Share capital is decreased through an amendment of statutes that reduces the nominal 317 value of shares, merger of shares or redemption of a part of shares, as well as in the event of division through separation. A resolution on share capital decrease and announcement of shareholders’ meeting 318 should specify the purpose of reduction, amount by which share capital is to be reduced as well as manner of reduction. In the event of share redemption, if events foreseen in statutes occur and in the case of 319 failure by company to dispose of own shares by set deadlines, a shareholders’ meeting resolution is replaced by a resolution adopted by the management board in the form of a notary deed. The management board immediate announce a resolved decrease of share capital by 320 calling upon company creditors to file opposition within three months starting from the date of announcement if they do not agree to the decrease. Creditors filing opposition 707

321

Poland

II. Joint stock company (S.A.)

during this period should be satisfied or secured by the company. Creditors not filing opposition are deemed to agree to the share capital decrease. 321 An announcement is not required if: 1) shareholders are not reimbursed their contributions for shares despite a decrease of share capital, and are not also relieved of contribution for company capital, and together with its decrease an increase of company capital takes place up to at least its initial level through a new issue the shares of which shall be fully paid for, or if 2) a decrease of share capital is aimed at balancing incurred losses or transfer of specific sums to reserve capital that can be used solely to cover losses, or if 3) a decrease of share capital takes place in case of need to redeem own shares that were not disposed of by the appropriate deadline. 322 The management board reports a decrease of share capital to the registration court.

6.

Management Board

a)

Members of the management board

323 The management board is a company body conducting company affairs and representing the company. The management board may consist of one or more persons. 324 The supervisory board appoints and recalls management board members, unless company statutes regulate this issue otherwise. A management board member may be dismissed or suspended in duties also by the shareholders’ meeting at any time, irrespective of other statute provisions. 325 Entry of a management board member in the register has a declaratory nature. 326 The term of a management board member cannot be longer than five years. Repeated appointment of the same person as management board member is allowed for terms not longer than five years each. The mandate of a management board member expires at the latest on the date of shareholders’ meeting approving the financial statement for the last financial year when the management board member held office. 327 A management board member cannot without company consent deal with competing interests or participate in a competing firm as a shareholder of a company or partnership, or as a member of a company body or participant in another competing legal entity as body member. This ban also covers shareholding in a competing company and possession by a management member in such company of at least 10 % of shares or stock or right to appoint at least one management board member. Unless statutes state otherwise, consent is granted by the body entitled to appoint the management board.

708

6. Management Board

b)

Poland

328

Management and representation

The right of management board member to represent the company concerns all court 328 and non-court company actions. Such construed right to represent the company cannot be limited in legal effect toward third parties. If the management board is multi-person, statutes set the manner of company repre- 329 sentation. If they contain no provisions on this matter, joint action by two management board members or one member together with proxy is required for issue of declarations in the name of the company. This principle does not exclude establishment of singleperson or joint proxy and does not limit the rights of proxies stemming from proxy regulations. In an agreement between the company and a management board member, as well as in a 330 dispute with him, the company is represented by the supervisory board or proxy appointed by a shareholders’ meeting resolution. This principle does not apply if all company shares are accorded to a single shareholder, 331 or single shareholder and the company, and this shareholder is also the sole management board member. Then, a legal action between this shareholder and his represented company must be in the form of a notary deed. The notary notifies the registration court of every such legal action by sending a copy of the notary deed. c)

Responsibilities and personal liability of members of the management board

Management board members, in principle, are not liable for company obligations. An 332 exception is the joint personal liability of management board members with the company toward company creditors in the event of deliberate or negligent provision of false data in declarations on payments for shares in the application of company for registration or in the application for registration of increased company share capital. A management board member, similarly to a member of the supervisory board, auditor 333 commission and liquidator is to liable toward the company for damage caused by action or omission contrary to the law or the articles of association, unless there is no guilt. d)

Other representatives of a joint stock company

Other than management board members, proxies can represent a joint stock company. 334 A proxy is a power of attorney granted by the management board that authorized court and out of court action and is related to enterprise management. A proxy must be extended in writing in order to be valid. A proxy may be a natural 335 person capable of legal action and proxy rights may be granted to several persons jointly or individually. Whereas the consent of all management board members is required to grant a proxy, any member may recall the proxy at any time.

709

336

Poland

II. Joint stock company (S.A.)

336 A proxy cannot be transferred. However, a proxy may appoint a representative for specific actions or certain type of action. Proxy rights expire upon deletion of company from the register, as well as in the event of bankruptcy, commenced liquidation or transformation of entrepreneur. The granting and expiration of proxy must be reported to the Register of Entrepreneurs. Notification of granted proxy should specify its type, and in the event of joint proxy, the manner of its exercise. 337 A separate specific power of attorney is required to sell an enterprise, undertake a legal action allowing its temporary utilization, as well as to sell and encumber real estate.

7.

Supervisory Board

a)

Mandatory/optional supervisory board

338 A supervisory board is a mandatory joint stock company body overseeing its activities. b)

Composition and responsibilities

339 A supervisory board consists of at least three natural persons with full capability to undertake legal actions. In the public companies the supervisory board shall consist of at least five members. The shareholders’ meeting appoints and recalls members, unless statutes regulate this issue differently. The term of each supervisory board member cannot be longer than five years. Repeated appoint of the same person is allowed for terms not longer than five years each. 340 A supervisory board acts collegially, but may nevertheless delegate its members to independent performance of specified supervisory duties. The supervisory board carries out constant supervision of company activity in all areas of its activity. In order to carry out its duties, a supervisory board may examine all company documents, demand reports and clarifications from the management board and employees, as well as review the status of company assets. 341 The authority of the supervisory board includes, in particular: – the adoption of resolutions on matters concerning company legal activities, if required by law or statutes, – the appointment and dismissal of management board members, setting of their remuneration, and consent to their involvement in competing interests, unless statutes stipulate otherwise, – an evaluation of the management board report on company activity and assessment of financial statement for the past financial year in relation to their conformance with books and documents and factual status, review of management board motions on division of profit or coverage of loss, as well as the filing at the shareholders’ meeting of an annual written report on the results of this assessment, – representation of company in disputes and agreement between the company and its management board members, 710

8. Selected capitalization and liability questions

Poland

342

– suspension in duties, for important reasons, or individual or all management board members as well as delegation of supervisory board members for a period not longer than three months to temporarily assume duties of management board members who have resigned or been recalled, or who for other reasons cannot perform their tasks, – consent to actions by the management board if the authority of the supervisory board has been expanded in this manner in company statutes, The supervisory board has no right to issue the management board binding orders 342 concerning management of company affairs. c)

Qualifications

General provisions of the Commercial Companies Code contain no reference to spe- 343 cific qualifications of supervisory board members. The Code only states that a member of the management or supervisory board, audit commission or liquidator can only be a natural person with full capability to undertake legal actions. Moreover, a supervisory board member cannot simultaneously be a management board member, proxy, liquidator, director of branch or enterprise, or be employed at the company as chief accountant, legal advisor or advocate, or be another person directly subservient to the management board or liquidator. Laws outside the scope of the Code contain regulations on the need for supervisory 344 board members to possess necessary knowledge and qualifications to exercise duties, as well as the limited ability of one person to belong to several supervisory boards. For example, the supervisory board of a state bank is appointed for a period of three 345 years from among persons possessing appropriate qualifications within the scope of finance, and at least one-half of supervisory board members of a pension fund should have higher education in the area of law or economics.

8.

Selected capitalization and liability questions

a)

Prohibition of repayment of shareholder contributions

In general no refund can be made to a shareholder of payments for shares, in full or in 346 part, during the course of company existence. A shareholder cannot collect interest on contributions and on shares held. b)

Capital substituting loans

Shareholders in joint stock companies cannot be obliged to provide capital substituting 347 loans (additional payments).

711

348

c)

Poland

II. Joint stock company (S.A.)

Obligation to petition for insolvency proceedings

348 In accordance with the Bankruptcy and Composition Law Act of 28 February 2003, the management board is obligated, no later than within two weeks from the date when the basis arose to declare bankruptcy, to file a motion in court for declaration of bankruptcy. 349 Such basis is company insolvency. Insolvency means failure to meet obligations or the situation when the value of company liabilities exceeds the value of assets, even if the company meets its ongoing liabilities. In the event of failure by the management board to file a bankruptcy motion in court on time, it is liable for damages arising from this omission.

9.

Accounting

350 A joint stock company, similarly to a limited liability company, is subject in the scope of accounting and financial reporting to the provisions of the Accounting Act,5 Corporate Income Tax Act6 (“CIT Law”), and the Commercial Companies Code. a)

Bookkeeping and annual financial statements (publication obligations)

aa)

Bookkeeping

351 A joint stock company active in Poland must maintain bookkeeping records and other documentation according to principles specified in the Accounting Act covering, among others: – accepted standards (policy) for accounting, – maintenance, on the basis of accounting records, of books with entries of events in chronological and systematic order, – periodic determination or verification through inventory of the actual status of assets and liabilities, – appraisal of assets and liabilities as well as determination of financial results, – preparation of financial statements, – collection and storage of accounting records and other documentation required by law, – submission to review and announcement of financial statements when required by law. 352 Accounting records should be maintained at the registered office of a joint stock company. Companies with branches (enterprises) may maintain accounting records of branches (enterprises) at the registered office of such unit or branch (enterprise). 353 If a company entrusts bookkeeping to an entity entitled to render such services (e.g. an accounting firm), these books may be maintained within the territory of Poland outside the registered company office. However, in such a case, the head of a unit, which in the 5 6

712

Act of 29 September 1994 (i.e. Journal of Laws, 2002, No. 76 pos. 694 as amended). Act of 15 February 1992 (i.e. 2000, No. 54 pos. 654 as amended).

9. Accounting

Poland

354

case of a joint stock company is the management board, must notify the appropriate tax office of the location of bookkeeping within 15 days from the date of issue of books outside the company registered office (branch or enterprise). The management board is, moreover, obligated to ensure access to books for review by authorized external audit bodies at the registered office of unit (branch, enterprise). A management board is liable for carrying out the bookkeeping duties of a unit, even 354 when these obligations are entrusted to another party. If the management board is multi-person and no individual is held responsible, liability for carrying out bookkeeping duties of a unit in relation to bookkeeping is shared by all management board members. Management board liability is excluded only within the scope of carrying out an 355 inventory in the form of a list. Failure to fulfill duties stemming from the Accounting Act by obligated parties subjects 356 them to criminal liability, e.g.: – failure to maintain books, their improper maintenance, failure to prepare a financial statement or its improper preparation are subject to a fine or imprisonment up to two years or both. Persons responsible for preparing a financial statement, who fail to do so or prepare it in violation of the Accounting Act or include false data in such statement are subject to a fine or imprisonment up to two years or both, – failure to provide the annual financial statement required by the Accounting Act to an auditor for review, failure to publicly announce the annual financial statement or file it at the court register or failure to provide access to the financial statement and other documents for inspection by authorized entities are all subject to a fine or restriction of freedom. bb) Annual financial statements

Similarly as in the case of an sp. z o.o., the financial statement of a joint stock company 357 is prepared as of the date of closing books, thus, on the date of the concluding financial year, the date of concluded activity, including the sale and conclusion of liquidation or bankruptcy proceedings, as well as the date preceding a change of legal form, or decision on liquidation or bankruptcy – no later than within three months from the date of these events. A financial statement consists of the balance sheet, profit /loss statement, as well as 358 additional information on the introduction to the financial statement as well as additional information and clarifications. A financial statement should be drafted according to templates constituting attach- 359 ments to the Accounting Act and be in Polish as well as employ Polish currency. In the case of joint stock companies a financial statement also includes a list of changes in capital (funds), and in the case of investment funds, a list of changes in net assets and cash flow statement with the exception of financial statements of open investment funds that do not cover cash flow statements. 713

360

Poland

II. Joint stock company (S.A.)

360 The management board attaches a report on its activity during the financial year in an annual financial statement of a joint stock company. cc)

Simplified financial statement

361 Smaller firms may prepare a simplified financial statement. In order to file a statement in this form, a company cannot reach two of the following three sizes during a financial year: 1) average annual full-time employment is less than 50 persons, 2) the sum of balance sheet assets at the end of the financial year in Polish currency has not exceeded the equivalent of EUR 2,000,000, 3) net revenues from the sale of goods and financial operations have not exceeded the Polish currency equivalent of EUR 4,000,000. 362 Additional information is prepared an appropriate simplified form. dd) Preparation, review, acceptance and announcement of joint stock company financial statements:

363 Joint stock companies must meet the following annual reporting requirements: 1) Preparation by the management board of a financial statement and report on activity together with supplemental documents – within 3 months from the balance sheet date. A financial statement is signed and dated by the person entrusted to maintain company books as well as the management board, and if an entity is managed collectively, by all members of such body. A refusal to sign requires written justification attached to a financial statement. 2) Presentation by the management board of the financial statement and report on activity together with supplemental documents to the Ordinary Shareholders’ Meeting of a joint stock company, in accordance with laws binding upon the company, as well as provisions of statutes or the articles of association – within 3 months from the balance sheet date. 3) Filing at an appropriate tax office of a declaration of income (loss) attained during a given tax year – by the end of the third month of the following year. The company must pay tax due by the same deadline or the difference between tax due on income indicated in the declaration and the sum of paid tax advances for the period since the start of the year. 4) Selection by the company of an entity authorized to audit the financial statements (“auditor”). 5) Audit of financial statement by an auditor, which should take place and be completed between the date of financial statement drafted by the management board and the date 15 days prior to the Shareholders’ Meeting, which is to approval the statement. 6) Adoption of resolution by the supervisory board on evaluation of the company financial statement from the standpoint of its conformance to books and documents, as well as to the factual status and conclusions of management board concerning division of profit. The supervisory board presents this evaluation to the Ordinary Shareholders’ Meeting. The supervisory board issues a report upon re-

714

9. Accounting

Poland

364

ceipt of annual statement together with opinion of auditor no later than 15 days before the Ordinary Shareholders’ Meeting that is to approve the statement. 7) Access of shareholders to the annual financial statement and report on activity; if such financial statement is subject to mandatory audit, also the opinion and report of auditor – no later than 15 days prior to the Ordinary Shareholders’ Meeting. 8) Convention of an Ordinary Shareholders’ Meeting on the subject of approval of the annual financial statement, auditor opinion and supervisory board report – within 6 months of the balance sheet date. 9) Submission of the annual joint stock company financial statement and auditor opinion at the relevant tax office within 10 days from the date of approval, together with a copy of Ordinary Shareholders’ Meeting resolution approving the financial statement. 10) Placement of announcement in Monitor Polski Dział “B” containing the financial statement and extract of Ordinary Shareholders’ Meeting resolution approving the statement, as well as auditor opinion for companies required to audit the financial statement – submission for publication should take place within 15 days from the date of held Ordinary Shareholders’ Meeting, 11) Submission of the following by the management board at the relevant court register within 15 days from the date of approval of annual financial statement by the Shareholders’ Meeting: – annual financial statement, – auditor opinion, – copy of Ordinary Shareholders’ Meeting resolution on approval of annual financial statement and on division of profit or coverage of loss, – report on company activity. In the event of a company filing a simplified financial statement, the management 364 board, instead of the auditor opinion, submits information to the court register on the type of such opinion together with indication of whether it contains additional explanations. b)

Audit requirements

According to provisions of the Accounting Act, audit and announcement requirements 365 affect financial statements of all joint stock companies that continue their activity, with the exception of companies being under organization on the balance sheet date. Moreover, the same applies to financial statements of affiliated companies, including annual consolidated financial statements of capital groups. Companies placed under bankruptcy or liquidation are not covered by the mandatory 366 requirement of financial statement audit. In the event of company merger, financial statements of acquiring firms as well as newly 367 created companies, which are prepared for the financial year during which a merger took place, are subject to review.

715

368

c)

Poland

II. Joint stock company (S.A.)

Disclosure

368 The announcement requirement applies to financial statements of entities subject to audit of their financial statements, that is, all joint stock companies that continue activity with the exception of companies being under organization on the balance sheet date. 369 The company management board must submit the following documents for announcement within 15 days from the date of their approval: – introduction to the financial statement constituting the part of additional information, – balance sheet, – profit /loss account, – list of changes in capital, – cash flow statement for the financial year, – opinion of auditor, – resolution or decision of body approving the financial statement as well as division of profit or coverage of loss, – report on company activity. 370 Companies preparing a simplified financial statement present information in place of the auditor opinion on the type of such opinion and indication of whether it contains additional explanations. 371 Announcements are made in the official journal “Monitor Polski B”.

10. Taxation (only general aspects of the tax treatment, in particular applicable taxes) a)

Corporate Income Tax

372 According to CIT Law, a joint stock company with its legal registered office or place of management in Poland (Company) is taxed on all its income in Poland, irrespective of the source of such income. The Company and its shareholder(s) are taxed separately. CIT is payable on the total taxable income earned from any source during a tax year. Taxable income is the difference between revenues earned by the Company in a tax year and tax-deductible costs, irrespective of the source. When costs exceed the total amount of revenues, the difference constitutes a loss. 373 The tax year is, as a rule, a calendar year or any 12 consecutive months, if so chosen by a taxpayer. aa) Tax-deductible costs

374 All costs and expenditures incurred to obtain taxable revenues, except those specified in the CIT Law, should be treated as tax-deductible costs.

716

10. Taxation (only general aspects of the tax treatment, in particular applicable taxes)

Poland

375

bb) Utilisation of tax losses

The Company has the right to carry forward losses incurred in a tax year by deducting 375 such loss in various increments over the next five-year period. Deduction in one tax year, however, cannot exceed 50 % of tax loss carried forward from each year. cc) Thin capitalization

When using loans from shareholders and group companies as a method of financing, 376 Polish thin capitalisation rules must be observed, in order not to trigger restrictions in deductibility of interest paid under the loan agreements. CIT Law restricts financing through loans and credits granted by so-called “qualified lenders”, e.g. a company holding at least 25% of debtor shares. If the debt to equity ratio exceeds 3 to 1, part of the interest on the restricted loans is not tax-deductible. dd) Tax rates

Taxable income earned by the Company in a given tax year is, as of 1 January 2004, 377 subject to a flat 19% CIT rate. Also, capital gains are subject to the above standard 19% flat CIT rate. Interest and royalties received by non-resident companies are subject to a 20 % with- 378 holding tax, unless an applicable tax treaty provides otherwise. Dividend income and other participation in Company profits are subject to a 19% 379 withholding tax, unless a relevant double tax treaty provides otherwise. This tax is withheld at source by the payer of dividend. However, in order to apply the withholding tax rate on dividends, interest or royalties 380 provided by a given double tax treaty, it is necessary to obtain a certificate substantiating relevant tax residence of beneficiary receiving dividends, interest or royalties recipient concerned. Due to Polish EU accession, Poland is to implement the EU Parent-Subsidiary Direc- 381 tive. According to CIT Law, the Directive relief will be available to dividends payable to companies having their registered office in an EU Member State if they hold at least 25% of shares of the Polish subsidiary for an interrupted period of at least 2 years. As for royalties and interest, Poland is entitled under EU laws to an eight year transi- 382 tional period commencing on 1 January 2005. During this period Poland is entitled to apply withholding tax to interest and royalties paid by the Polish company to its related EU company at a rate not exceeding (1) 10 % for the first four years and (2) 5% for the last four years of transitional period. This regulation is without prejudice to provisions of relevant double tax treaties if treaties provide for lower rates. ee)

CIT treatment of investments in real estate

Among costs specifically mentioned in the CIT Law as not tax-deductible are expen- 383 ditures on acquisition or creation of fixed assets (e.g. buildings and constructions). Such expenditures become tax deductible costs only through depreciation write-offs. Thus, 717

384

Poland

II. Joint stock company (S.A.)

where an investment meets the CIT Law definition of a fixed asset, its investment costs should be generally recognised over time through depreciation deductions on the initial value of fixed asset. Expenditures on acquisition of land become tax deductible at the moment of disposal of land. b)

Tax on Goods and Services (VAT)

384 As of 1 May 2004, regulations of VAT taxation in Poland are based on VI Directive.7 For that reason, it is, in principle, similar to VAT regulations of other EU countries. aa)

Subject of VAT taxation

385 Under the Act on Goods and Services Tax8 (“VAT Law”) VAT applies to the following transactions: – supply of goods and services made in Poland for consideration. The supply of goods includes hand over by a taxpayer of business-related goods for non-business related purposes, e.g. donations. However, the supply of samples and small gifts is not subject to VAT, – export of goods outside the EU, – import of goods from outside the EU, – intra – Community acquisition of goods effected for consideration in Poland, inclusive of the movement of goods between different Member States within the same business, – intra – Community supply of goods inclusive of the movement of goods between different Member States within the same business bb) Location of taxation

386 Determining of the location of supply is crucial for determining location of VAT taxation. 387 As for the supply of goods the location is considered as the following: – the location where the goods are at the time of dispatch or transport to the purchaser – the location of installation or assembly – the location where goods are at the time of delivery (when not dispatched or transported) – the location where passenger transport starts – as regards delivery of goods on ship, plane or train, – the country of importation. 388 The location for intra-Community acquisition is, in principle, the location where transport or dispatch ends.

7 8

718

Official Journal L 145, 13/06/1977 P. 0001-0040. Act of 11 March 2004 (Journal of Laws 2004, no. 54 pos. 535).

10. Taxation (only general aspects of the tax treatment, in particular applicable taxes)

Poland

389

The location of supply of services, in principle is the location where a supplier has his 389 registered office or fixed location of business, or the location of residence. However, there are special rules determining the supply, inter alia, of: – intangible services, e.g. consultancy, advertising, electronic etc. – the location of supply is assigned to the location of establishment of customer provided that the customer is a taxpayer established in the EU or any entity established in a third country, – services connected to immovable property – the location of supply where the property is situated, – transportation services – the location of supply is the place where transport takes place with regard to distances covered. cc) VAT Registration

The Company should be registered as a VAT taxpayer before execution of first operation 390 making it subject to Polish VAT. To be registered as a VAT taxpayer, it must file an application for registration with the relevant authority. It is then registered as an active taxpayer or exempted taxpayer. For intra-Community transactions, the entity should be registered as an EU VAT tax- 391 payer and an application must be made. After registration for EU VAT, a taxpayer is under the obligation to use that VAT number in intra-Community transactions. Taxpayers whose net amount of taxable sales did not exceed EUR 10,000 in the previous 392 year are exempt from VAT. However, taxpayers are entitled to elect not to use the exemption provided that they notify the relevant tax office of their intention. dd) VAT rates

At present, the standard VAT rate is 22%. This rate applies to all supplies of goods and 393 services not qualifying for one of the reduced rates or exemption. There are reduced rates of VAT, i.e. 7%, 3%, 0 % (exemption with credit, according to the European VAT nomenclature). Certain activities are exempt. c)

Other taxes

aa)

Real estate tax

Real estate tax is levied on business entities if they are owners or freeholders of property 394 and those being dependent holders or administrators of property that belong to the state when such tenure of land results from a legal agreement. This includes buildings, constructions used for business purposes and land not subject to agricultural tax. Tax rates are determined by local councils. As of 1 January 2004, the rates determined by local councils cannot exceed PLN 17.42 395 per square meter for buildings used for business purposes, PLN 0.63 per square meter for land used for business purposes and 2% of the value of constructions fixed for depreciation purposes. The rates set by local councils cannot be lower than 50 % of those rates cited above.

719

396

Poland

II. Joint stock company (S.A.)

bb) Civil Law Activities Tax (“CLAT”)

396 CLAT, formerly “stamp duty”, is a transfer tax applicable to civil law transactions including, but not limited to: contracts on the sale of assets and property rights, loan agreements and articles of association. The sale of real estate, perpetual usufruct of land and movables are generally subject to a 2% tax. The sale of certain property rights (e.g. sale of shares) is taxed at a rate of 1%. As a rule, CLAT is not due when VAT applies. 397 In case of Company incorporation, CLAT on Company articles of association is levied at the rate of 0.5% of Company share capital. 398 Loan agreements are generally subject to a 2% tax, although certain exemptions and preferential rates apply. Loans granted by a shareholder to a limited liability company (e.g. the Company) are exempt from CLAT. 399 An increase of share capital as well as additional payments to share capital are subject to 0.5% CLAT of the amount of increase or amount of additional payment made to share capital. cc) Gambling Tax

400 Gambling tax is imposed on companies conducting gaming activities. The tax depends on the type of game and value of turnover, from 10 % for rattles to 45% for slot machine games.

11. Dissolution of a company/termination of the business 401 Dissolution of company is caused by: 1) reasons foreseen in statutes, 2) a shareholders’ meeting resolution on dissolution of company or transfer of its registered office abroad, 3) declaration of company bankruptcy, or 4) other reasons foreseen by law, e.g. a registration court ruling, as well as reasons provided by non-Code laws. 402 Dissolution of company takes place after liquidation at the moment of deletion from the register. 403 Liquidation commences on the date of court decision on company dissolution becoming legally valid, adoption of a shareholders’ meeting resolution on company resolution or the appearance of another cause for dissolution. Liquidation is conducted under the name of company followed by the designation “in liquidation”. 404 The company maintains legal personality during the course of liquidation. During this time no payment from profits, even partial, can be made to shareholders, nor can company assets be divided prior to payment of all liabilities.

720

11. Dissolution of a company/termination of the business

Poland

405

Management board members are liquidators, unless statutes or a shareholders’ meeting 405 resolution constitute otherwise. They are obligated to declare commencement of liquidation, the names of liquidators and their home or correspondence addresses, manner of company representation by liquidators and all amendments in this regard in the register. Liquidators should next prepare a balance sheet on commencement of liquidation and 406 present it to the shareholders’ meeting for approval, and are also required to announce dissolution of company and commencement of liquidation twice during an interval period not longer than one month and not shorter than two weeks, whereby creditors are summoned to declare their received within six months from the date of final announcement. The activity of liquidators should be limited to conclusion of ongoing company busi- 407 ness, collection of receivables, fulfillment of obligations and liquidation of company assets (liquidation activities). New business can only be undertaken if necessary to conclude ongoing affairs. Real estate may be sold through a public auction, or independently only by force of a shareholders’ meeting resolution and at a price not lower than that resolved by the meeting. Liquidators have the right within the bounds of their authority to conduct business and represent the company. In internal relations, liquidators must abide by shareholder meeting resolutions. This principle does not apply to liquidators appointed by courts. Commencement of liquidation causes expiry of proxy and no new proxy may be estab- 408 lished during the time of conducted liquidation. If company capital has not been paid in fully and assets are insufficient to cover 409 company liabilities, liquidators should collect sums from each shareholder, starting with shares without privilege as to division of assets, to the extent necessary to cover liabilities. Sums required to satisfy or secure creditors known to the company, who have not come 410 forth or whose receivables are not due or are not disputed should be filed for court deposit. Upon approval by the shareholders’ meeting of the financial statement as of the date 411 preceding the division among shareholders of assets remaining after satisfaction or security of creditors (liquidation report) and upon completion of liquidation, liquidators should announce this report at the company registered office and file it with the registration court with simultaneous filing of a motion for deletion of the company from the register. Books and records of a dissolved company should be provided for storage to a party indicated in the statutes or a shareholders’ meeting resolution. If no such indication exists, the registration court should then provide storage.

721

Slovak Republic Slavomr Cˇauder

Table of Contents I.

Introduction

II. Joint Stock Company 1. a) b) c) 2. a) a) b) c) d) e) 3. a)

b)

c) d)

e)

Basic Characteristics of a Joint Stock Company Basic Structure of a Joint Stock Company Registered Capital Significance of the Joint Stock Company in Slovak Business Life Formation of a Joint Stock Company Foundation Procedure Registration Procedure Further Approval Requirements Shelf Companies Costs and Duration Company Stationary Shareholders Rights and Obligations of the Shareholders of a Joint Stock Company aa) Basic Rights bb) Basic Obligations General Meeting of the Shareholders aa) Necessary Majority bb) Restriction on Shareholders’ Rights to vote cc) The Course of the General Meeting dd) Challenge of Decisions of the General Meeting The Shares of a Joint Stock Company Classes of Shares aa) Outlay of the Shares bb) Form of Shares cc) Type of Shares dd) Collective Shares Transfer of Shares

Slavomr Cˇauder

726

f)

727

g)

727

4. a) b) c) d)

728 728 728 728 729 730 732 732 732 733 733 733 733 734 735 736 737 737 737 738 738 738 739 739 739 739

5. a) b) 6. a) b) 7. a) b) c)

8. a) b) c) 9. 10. a) b) 11. 12.

Acquisition of Own Shares by the Company Other Securities Issued by a Joint Stock Company The Articles of Association Mandatory Content Optional Provisions Change of the Articles of Association Increase and Decrease of the Registered Capital of the Joint Stock Company aa) Increase of the Registered Capital bb) Decrease of the Registered Capital The Board of Directors Members of the Board of Directors Management and Representation Supervisory Board Members of the Supervisory Board Competence Selected Capitalization and Liability Questions Capitalization of the Receivable Liabilities of the Joint Stock Company Special Relations Between the Company and the Members of Its Bodies Accounting Financial Statements Audit Requirements Reserves Taxation Termination of the Business Dissolution of the Company Liquidation of the Company (Winding-Up) Insolvency Choice of Seat Outside the Slovak Republic

740 741 741 741 742 742 742 742 744 744 744 745 746 746 746 747 747 747

747 747 747 748 748 748 749 749 750 750 751

723

Slovak Republic III. Limited Liability Company 1. a) b) c) d) e) 2. a) b) c) d) e) f) 3. a)

Basic Characteristic of a Limited Liability Company Typical characters of a Limited Liability Company Basic Structure of a Limited Liability Company Number of Shareholders Registered Capital Significance of the Limited Liability Company in Slovak Business Life Formation of a Limited Liability Company Formation Procedure Registration Procedure Approval Requirements Shelf Companies Costs and Duration Company Stationary Shareholders Rights and Obligations of the Shareholders of a Limited Liability Company aa) Basic Rights

Index 751 751 751 752 752 752 753 753 753 753 756 757 757 757 758

b) 4. 5. 6. 7. 8. 9. 10. a) b)

bb) Basic Obligations cc) Shareholders’ Meeting dd) Shareholders’ Decisions without Shareholders’ Meeting Shareholder’s Exclusion Shares Agreement of Association Managing Director(s) Supervisory Board Accounting Taxation Termination of the Business Dissolution of the Company Liquidation of the Company

759 759 761 762 762 764 764 766 766 767 767 767 768

IV. Other corporate forms

in the Slovak Republic 1. 2.

769 769 769

Commercial Partnership Limited partnership

V. Branch office of foreign entity

in the Slovak Republic

770

758 758

Index Accounting Year 130 Agreement of Association 18, 19, 21, 23, 36, 67, 142, 157, 161, 164, 165, 176, 179, 185, 187, 190, 194, 196, 200-5, 209-211, 214, 215, 217 Agreement on Performance of Function 109 Audit 132 Board of Directors 11, 21, 30, 32, 39, 44, 45, 50, 52, 53, 55, 65, 66, 71, 86, 89, 92, 100, 103, 105, 107- 114, 118, 119, 126, 127, 134 Business shares 207, 208 Commercial Register 17, 25, 26-33, 35, 37, 38, 68, 87, 93, 98, 100, 112, 118, 128, 131, 137, 138, 143, 146, 147, 156, 159, 160, 162, 163, 166, 168, 171, 174, 177, 178, 206, 220, 221, 223, 226, 227, 229, 234

724

Contribution 8, 19, 21, 24, 27, 32, 38, 45, 97-100, 124, 147, 153, 154, 160, 160, 164, 166, 178-182, 185, 187, 190, 193, 195, 199, 200, 201, 203, 209, 234, 235 Contribution, Kind 19, 21, 27, 98, 100, 160, 166, 187, 209 Contribution, Monetary 27, 97, 99, 160, 207 Corporate Income Tax 135, 222 European Union 2, 110 Financial Statements 54, 120, 128-132, 187, 213, 217, 220 Foreigner 110 Foundation 12, 17-26, 28, 32, 34, 156, 157, 159, 166, 174, 175, 183 Foundation Deed 183 Foundation Meeting 21-23, 32 General Meeting 11, 21, 39, 40, 41, 43, 44,

Slavomr Cˇauder

List of reference books and publications 49-68, 74, 81, 88, 92, 93, 95, 97-99, 103, 104, 108, 109, 112, 116, 121 Liquidation 83, 141, 142, 207, 223, 227-229 Liquidators 53, 67, 142, 183, 216, 228 Loan 127 Managing Director 67, 149, 163, 166, 173, 179, 181, 183, 185, 187, 189, 194, 195, 197, 209-218, 228 Notarial Deed 22, 23, 32, 36, 94, 157, 175 Notary Fees 36 Registered Capital 5, 8, 14, 15, 19-21, 23, 27, 36, 38, 44, 45, 52, 59, 62, 69, 71, 74, 81-83, 87, 90, 93, 95-106, 124, 133, 147, 153, 154, 160, 164, 178, 182, 185, 187, 190, 192, 195, 199-201, 209 Registered Capital, Decrease 62, 82, 83, 90, 93, 104-106, 187, 192, 199 Registered Capital, Increase 62, 90, 93, 95-103, 187, 192 Registration 17, 21, 24-33, 35, 37, 38, 45, 78, 79, 85, 93, 98, 100, 146, 156, 159-171, 174, 177, 178, 187, 206 Reserve Fund 90, 133, 134, 139, 179, 209, 225

Slovak Republic Shareholders 8, 11-13, 21, 26, 39-85, 86, 91, 99, 101, 102, 114, 125, 138, 142, 146, 149, 150, 151, 156, 164, 171, 176, 179-200, 201-204, 206-209, 211-215, 217, 219, 224, 228, 229, 231 Shareholders’ Agreement 183, 186, 192 Shareholders’ Meeting 141, 142, 149, 150, 176, 181, 183, 187-200, 202, 205, 206, 211-213, 217-219, 225, 228 Shares 5, 8, 10, 12, 14, 19-21, 39, 41, 42, 44-8, 63, 69-87, 90, 91, 93, 96, 99-103, 106, 135, 179, 201-208 Shelf Company (-ies) 35, 174 Sole Shareholder 12, 51, 151, 160, 164, 198 Statutory Body 111, 142, 210, 213, 215, 228, 233, 237 Supervisory Board 11, 21, 32, 53, 55, 65, 66, 67, 86, 89, 108, 109, 112, 113, 115-123, 127, 149, 183, 187, 189, 209, 217-219 Trade Licenses 25, 28, 32, 34, 159, 165, 166, 173, Transfer of Shares 19, 73, 76-80, Value Added Tax 135, 222 Voting Rights 48, 65, 84, 193,

List of reference books and publications Doc. JUDr. P. Kubı´cˇek, CSc. a kolektı´v autorov Akciov spolocˇnost' – jej organizacˇn a financˇn riadenie. Bratislava: Verlag Dashfer JUDr. M. Freund, CSc., JUDr. Z. Rekenova´, JUDr. P. Sˇmeringai Obchodn prvo a niektor sﬄvisiace predpisy 1. Bratislava: Iura Edition 1993 JUDr. M. Freund, CSc., JUDr. Z. Rekenova´, JUDr. P. Sˇmeringai Obchodn prvo a niektor sﬄvisiace predpisy 2. Bratislava: Iura Edition 1993 D. Hanes Spolocˇnost' s rucˇenm obmedzeny´m v novej prvnej ﬄprave. Bratislava: Iura Edition 2002 O. Korec Prvna ﬄprava obchodny´ch spolocˇnost v sﬄvislosti so zahranicˇny´m prvkom. Bratislava: Prvnick fakuta Univerzity Komenskho 1995 L. Balko Obchodn a financˇn prvo. Diel I, Obchodn prvo. Bratislava: Epos 2001 J. Suchozˇa a kolektı´v Obchodny´ zkonnk a sﬄvisiace predpisy: komentr. Bratislava: Eurounion 2003 Kolektı´v autorov Obchodny´ zkonnk. Bratislava: Nov prca 2002 Doc. JUDr. Ma´ria Patakyova´, CSc. Spolocˇnost' s rucˇenm obmedzeny´m a jej konatel'. Bratislava: Verlag Dashfer

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1

I.

Slovak Republic

I. Introduction

Introduction

1 Slovakia, similarly as the Czech Republic, was once part of the multinational monarchy of Austrian-Hungarian Empire lasting until 1918. In 1918 the Czechs and Slovaks formed an independent state of Czechoslovakia. After World War II, in February1948, the Communists seized the power, but the two nations remained ‘allied’ until 1992, when the Federal Assembly of Czechoslovak Federation enacted the dissolution of Czechoslovakia and the separation of the Czech and Slovak Republics. Nevertheless, the mutual history significantly marked legal principles and structure of legislation in both countries. 2 Therefore, Slovak business law, equally as Czech law, may be regarded as part of the central-European legal culture, based on the principles of Austrian and, partly, German legal systems. Although the Czech and the Slovak Republics came a long way as independent countries since 1993, the majority of legislation relevant to entrepreneurship and investment were approved in the early reform process after the fall of communism in Czechoslovakia, i.e. between years 1989 and 1992. This is why, you will find throughout this chapter on Slovak law immense similarities and cross-references to the provisions of Czech law described elsewhere in this publication. 3 Since its independence, Slovakia was viewed by many European politicians and foreign investors with a great caution. However, after 1998 the business climate changed substantially thanks to a liberal government that took the country long way down the reform path. Slovakia became member of NATO, OECD and the EU and is currently viewed as a very attractive investment territory with some of the lowest tax rates in Europe, substantially shorten process of establishment of a company and very modern legal instruments introduced in legal acts on investment incentives, real estate register, employment, pension funds, social security, etc. 4 Accession to the European Union had a major impact on the Slovak legal system. The necessary adoption of the common body of the European laws, the acquis communautaire, meant that numerous new legal rules had to be introduced into the legal system in the Slovak Republic. Today 90 % of the Slovak legislation is fully compatible with the sources of European law. 5 The legal framework of the corporate system is principally set out by two basic codes: the Commercial Code1 and the Civil Code,2 both adopted in the Czechoslovak Federation time. Therefore, the both Codes still carry the same number in the Collection of Laws and, although amended numerous times since then, developed very similar provisions and differ only in some very specific sections. The Slovak corporate law is also affected by a number of special legal rules, such as the Trade Act, the Commercial Register Act, the Securities Act, etc.

1 2

726

Act No. 513/1991 Coll., as amended. Act No. 40/1964 Coll., as amended. Slavomr Cˇauder

1. Basic Characteristics of a Joint Stock Company

Slovak Republic

6

The corporate forms in the Slovak Republic, as in the Czech Republic, may be divided 6 into two types – the traditional ones and the European ones. The first category, which is the subject-matter of this study, represents four corporate forms – the joint stock company,3 the company with limited liability,4 the commercial partnership5 and the limited partnership.6

II. Joint Stock Company 1.

Basic Characteristics of a Joint Stock Company

Slovak Joint Stock Company7 (hereinafter referred to as the “joint stock company” or 7 the “company”) is regulated by the Slovak Commercial Code,8 special regulations can be found also in specific laws. 9 A joint stock company under Slovak law may be described as a capital based company 8 with a certain registered capital, which is divided into a certain number of shares. The basic principles of a joint stock company are the following: – the obligation of the company to have a certain registered capital; – the obligation of the shareholders to make a contribution to the registered capital of the company; – the participation in the management of the company by its shareholders solely through certain bodies of the company; – no liability of shareholders for the obligations of the company; – any loss of the company is basically not allocated among the shareholders. The name of the company must include the identification “Joint Stock Company” 9 (“akciov spolocˇnost'”), so called legal form supplement. The abbreviation “akc. spol.” (“Joint Stock. Comp.”) or “a.s.” (“J.S.C.”) is also sufficient.10 A joint stock company can be either private or public one. A public joint stock 10 company is a company, which has emitted all its shares or a part of it on basis of the public offering of the shares or the shares of which have been accepted for the trading at the Stock Market. A private joint stock company is a company that does not fulfill the mentioned condition for the public Joint stock company.11 3 4 5 6 7 8 9

10 11

In Slovak: ‘‘akciova´ spolocˇnost’’’. In Slovak: ‘‘spolocˇnost’ s rucˇenı´m obmedzeny´m’’. In Slovak: ‘‘verejna´ obchodna´ spolocˇnost’’’. In Slovak: ‘‘komanditna´ spolocˇnost’’’. In Slovak: ‘‘akciova´ spolocˇnost’’’. Act No. 513/1991 Coll., Commercial Code, as amended, esp. Sec. 154-220a. E.g. Act No. 530/2003 Coll., Commercial Register Act, as amended; Act No. 455/1991 Coll., Trade Act, as amended. Sec. 154 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 154 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

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11

Slovak Republic

a)

Basic Structure of a Joint Stock Company

II. Joint Stock Company

11 The basic structure of the company consists of three bodies. The enterprise of the company is managed by the board of directors, which represents the company vis-vis third parties. In contrast, the influence of the shareholders, who represent the capital part of the company, is limited especially to their participation in the general meeting of the company. The third body of the company, the supervisory board, oversees the activities of the board of directors. 12 A sole shareholder may found a joint stock company, but only in case that this sole shareholder itself is a legal entity. This limitation only applies to the foundation of the company. In case that during the existence of the company all shares are concentrated in hands of a single person, this does not mean that the company ceases to exist or has to be liquidated, even if the sole shareholder is a natural person.12 13 Under applicable Slovak law there is no maximum number of shareholders of a joint stock company. b)

Registered Capital

14 The minimum amount of the registered capital of a joint stock company is SKK 1,000,000 or EUR 25,000 if the nominal value of shares is in EUR.13 15 Certain laws state that special institutions such as banks or insurance companies may only operate in the form of a joint stock company. Often these laws also require a higher minimum amount of registered capital for such institutions. c)

Significance of the Joint Stock Company in Slovak Business Life

16 The joint stock company is one of the most common forms used by enterprises on the Slovak market. The total number of joint stock companies in the Slovak Republic amounted to 4,13514 as of December 31, 2003.

2.

Formation of a Joint Stock Company

17 The formation of a joint stock company under Slovak law may be divided into two major parts. First, the foundation by the founder(s) and second, the establishment by the registration with the Commercial Register.

12 13 14

728

Sec. 162 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 162 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slovak Statistical Office, Organizational statistics. Slavomr Cˇauder

2. Formation of a Joint Stock Company

a)

Slovak Republic

18

Foundation Procedure

In case a sole founder intends to found a joint stock company, it has to decide on the 18 deed of foundation.15 In case there are more founders, they have to agree on the agreement of association16 of the company under the applicable Slovak law. Both the agreement of association and the deed of foundation have to include the same mandatory provisions (hereinafter collectively referred to as “agreement of association”).17 The agreement of association must include a catalogue of specifications, namely the 19 business name under which the future company shall operate, the seat of the company, its scope of business, the proposed amount of the registered capital, the number of shares, the nominal value of each share, the type and form of shares, in case of different kinds of shares the name of each kind and the description of rights connected with each kind of shares, the information on the restricted transfer of shares if the transferability of inscribed (na meno) shares shall be restricted, the issue rate, the number of shares to be subscribed by each founder, the subject of the contribution in kind to the registered capital and its value in which it will be counted in on the issue rate, the name of the person who shall administer the contributions to the registered capital and the approximate amount of the foundation and establishment costs. The next step in the foundation procedure may be a public offer, in which the founders 20 of the future company call on the public to subscribe shares in the future company. Today in the Slovak business life the most of all joint stock companies are established without such public offer. They are instead established without a public offer, i.e. the founders themselves subscribe the shares for the whole amount of the registered capital of the future joint stock company. Therefore, there are two different scenarios: In case the company is being founded with 21 a public offer,18 the founders call on the public to subscribe shares in the future company, the call has to include the same obligatory provisions as the agreement of association and has to be published. Then, the public can subscribe the shares by registration into the subscriber’s list or by a written declaration. It is not possible to subscribe the shares by contribution in kind, only monetary contributions are allowed. Then, after the required conditions of the share’s subscription are fulfilled, the foundation meeting has to take place. At least 30 % of the nominal value of the subscribed shares has to be paid until the beginning of the foundation meeting. This meeting, to which all future shareholders who have duly made their respective contribution to the registered capital are to be invited, formally decides on the establishment of the company. The foundation meeting further approves the articles of association19 of the future company. The foundation meeting has to elect the necessary bodies of the company, which shall be elected by the general meeting according to the articles of association, namely the 15 16 17 18 19

In Slovak: ‘‘zakladatel’ska´ listina’’. In Slovak: ‘‘zakladatel’ska´ zmluva’’. Sec. 163 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 164-171 of the Act No. 513/1991 Coll., Commercial Code, as amended. In Slovak: ‘‘stanovy’’.

Slavomr Cˇauder

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22

Slovak Republic

II. Joint Stock Company

supervisory board and the board of directors (if not elected by the supervisory board in accordance with the articles of association). 22 A notarial deed has to be made about the performance of the foundation meeting; the notarial deed includes also the articles of association and all other decisions made by the foundation meeting. 23 In case the company is being founded without a public offer,20 i.e. the founders agreed to pay the whole amount of the proposed registered capital, no foundation meeting has to take place, the founders themselves decide on the company’s foundation. In such case, the agreement of association has to be made in form of a notarial deed and has to include also the articles of association. 24 Until the registration procedure has been completed, the founder or a bank as specified in the articles of association manages the contributions. a)

Registration Procedure

25 The company is established as of the date of its registration with the Commercial Register. The application for the registration has to be filed within ninety days from the foundation of the company or from the delivery of the document(s) proving the right to conduct trade (trade license) or another undertaking.21 26 Before registration the company does not exist. In case someone acts on behalf of the company in the time period between the foundation and the establishment of the company, the basic rule is that this person is personally liable (or, if more persons act, they are jointly liable) for any obligation that results from such action. Nevertheless the shareholders or a competent body of the company may approve the respective action within three months after the registration of the company in the Commercial Register. In this case, an obligation resulting from such activities shall be considered to be binding for the company as of the time the respective action was taken. 22 27 Before the filing of the application for the registration of the company with the Commercial Register, 30 % of each monetary contribution have to be paid and before the registration of the registered capital’s amount,23 all contributions in kind have to be transferred in full.24 28 After the necessary acts for the foundation of the company have been completed, there is a legal obligation to register the company with the Commercial Register. The application for the registration has to be submitted to the Commercial Registry within

20 21 22 23 24

730

Sec. Sec. Sec. Sec. Sec.

172-174 of the Act No. 513/1991 Coll., Commercial Code, as amended. 62 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 64 of the Act No. 513/1991 Coll., Commercial Code, as amended. 175 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 59 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

2. Formation of a Joint Stock Company

Slovak Republic

29

90 days from the foundation of the company or from the moment the company has obtained all trade licenses necessary for conducting its business. The Commercial Register Act governs the registration procedure. 25 This act indicates 29 which data are registered, which documents must contain the Documents’ Registry, which court decides on register matters, etc. The application for the registration has to be filed on a special form. The application for 30 registration with the commercial register has to be signed and filed by all members of the board of directors. The signatures of the applicants or their authorized representatives must be notarized.26 The register court shall prove before the registration with the Commercial Register if 31 the following conditions have been fulfilled:27 – the application has been filed by the entitled person; – the application is complete;28 – all required documents are attached to the application and have the form as required by law; – the data in the application correspond with the data arising from the attached documents; – the court’s fee has been paid.29 The documents to be submitted to the Commercial Register are notarial deeds, which 32 provide evidence that foundation meeting took place and approved the articles of association (in case of foundation with the public offer) or that the founder have properly founded the company without the public offer, the respective trade licenses, concessions or other business permissions, as required by the proposed scope of business of the company, and a declaration of the contribution manager, which states that all contributions have been made in the required manner. In addition, the Commercial Register requires documents which prove that: the company has legal title to the real estate, where it shall have its seat, an affidavit of the members of the board of directors on their capability to perform this function, an extract from the criminal register of each member and a specimen signature for each member. The same documents are also required from all members of the supervisory board.

25 26 27

28

29

Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 5 (3) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 6 (1) and Sec. 7 (3) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. The following applications are considered to be incomplete: applications not filed on the form as required; applications not containing all required data; applications containing solely data the registration of which is not required by law; incomprehensible applications (Sec. 6 (2) a) through d) of the Act No. 530/2003 Coll., Commercial Register Act, as amended). Sec. 6 (1) a) through f) of the Act No. 530/2003 Coll., Commercial Register Act, as amended.

Slavomr Cˇauder

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33

Slovak Republic

II. Joint Stock Company

33 When the Commercial Register approves the registration, the content of the Commercial Register excerpt regarding the company is published in the Business Bulletin. 30 Upon publication in this Bulletin, the registration becomes effective vis--vis third parties. b)

Further Approval Requirements

34 Usually, in order to start its business, the company must be in possession of further documents that prove that it has the necessary permissions to conduct its proposed business. In most cases, these are trade licenses. Under the applicable Slovak law31 there are several different kinds of trades. The legal entity may use the trade licenses only through a registered responsible person who must be in employment relationship with the company. In special cases, the trade licenses require special knowledge, professional training or education. c)

Shelf Companies

35 Shelf companies, i.e. companies founded in advance for the purpose of a faster access to the Slovak market, are loosing their importance because of the faster formalized registration procedure. The new procedure of registration with the Commercial Register allows finishing the foundation and establishing of a company within 10 days. d)

Costs and Duration

36 Several documents needed for the establishment and existence of the joint stock company must be in the form of a notarial deed. Consequently, a large proportion of the costs for the establishment of the Company comprise of notary fees. The fees for the formation of a notarial deed are calculated on the basis of the value of the respective subject, here the amount of the registered capital, as follows: 2% from the value up to SKK 100,000, plus 1% from the value exceeding SKK 100,000 up to SKK 500,000, plus 0.5% from the value exceeding SKK 500,000 up to 1,000,000 etc. It means, for the agreement of association of a company with registered capital in amount of SKK 1,000,000 written in form of a notarial deed, the notary’s fee would amount to SKK 8,500. 32 37 For the application for the registration of a company with or its deletion from the Commercial Register, the court’s fee in amount of SKK 10,000 has to be paid. For each other change (or changes if applied in one application) the court’s fee in amount of SKK 1,500 has to be paid.33 30

31 32

33

732

Slovak ‘‘obchodny´ vestnı´k’’. Sec. 10 of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Act No. 455/1991 Coll., Trade Act, as amended. Part A, sec. 4. of the Annex to the Ministry of Justice’s decree No. 31/1993 Coll., on the notaries’ remuneration and fees, as amended. [Cca. EUR 220]. Item No. 17 of the Act No. 71/1992 Coll., on the courts’ fees and the fees for Criminal Register excerpts, as amended. [Cca. EUR 38]. Slavomr Cˇauder

3. Shareholders

e)

Slovak Republic

38

Company Stationary

Every entrepreneur (natural person or legal entity) is obliged to indicate in its business 38 letters and written or electronic orders its firm, registered seat or address, legal form of the company and the identification number, if granted. The entrepreneurs registered with the Commercial Register shall indicate also the register they are registered with and the registration number. If the amount of the registered capital is indicated in the company’s stationary (which is not obligatory), also the amount of the paid in contributions has to be indicated. The mandatory data has to be indicated also in all official written communication. 34

3.

Shareholders

a)

Rights and Obligations of the Shareholders of a Joint Stock Company

Both, rights and obligations of the shareholders of a joint stock company under Slovak 39 law are rather limited compared to those of the shareholders in a company with limited liability or even more significantly compared to the partners in a commercial partnership. Joint stock company shareholders only participate in the capital part of the company. The board of directors manages the enterprise part of the company. Consequently, the influence of the shareholders on the operation of the company is basically limited to their participation in the general meeting of the company. aa)

Basic Rights

The most important right of a shareholder is, of course, the shareholder’s right to the 40 annual profit of the company, the dividend. If not stated otherwise in the articles of association, the shareholder’s right to the dividend is calculated as a proportion of the nominal value of the shareholder’s share(s) to the nominal value of all shares in the company. 35 The respective profit as shown in the balance sheets of the company has to be approved by the general meeting for the distribution to the shareholders. 36 There is no right of the shareholders to any profit of the company other than the dividend, such open or even hidden profit distributions to shareholders are to be returned to the company. 37 The general meeting deciding on the profit distribution shall specify the method and 41 place of the dividend payment. 38 In the public joint stock companies, the claim of the shareholder to the dividend becomes due within sixty days after the decisive day (i.e. day specified by the general meeting or, if such day has not been specified, day when the shareholder has set up its claim for the dividend).39 34 35 36 37 38 39

Sec. Sec. Sec. Sec. Sec. Sec.

3a (1) and (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 178 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 187 (1) e) of the Act No. 513/1991 Coll., Commercial Code, as amended. 179 (9) of the Act No. 513/1991 Coll., Commercial Code, as amended. 178 (6) of the Act No. 513/1991 Coll., Commercial Code, as amended. 178 (5) of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

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42

Slovak Republic

II. Joint Stock Company

42 The shareholders also have the right to a proportional part of liquidation balance of the company. In case the company is liquidated, such liquidation balance is to be allocated among the shareholders in the proportion to the nominal value of their shares. 40 43 As a general rule, the right of the shareholders to participate in the management of the company and their corresponding right to information on the company is limited to their right to participate in the general meeting. Each shareholder is entitled to vote and to make proposals and counter-proposals at the general meeting and to require information and explanations regarding the management and business activities of the company. 44 Under certain conditions, the shareholder may also have the right to convene a general meeting of the company. This right is limited to shareholders who own shares whose nominal value exceeds 5% of the total registered capital of the company or less if stated in the articles of association. These shareholders are entitled to require the board of directors to convene a general meeting. In case, the board of directors fails to comply with this obligation within 40 days, a court shall decide that the respective shareholders are entitled to convene the general meeting themselves and to take all other necessary steps connected therewith.41 bb) Basic Obligations

45 The major obligation of the shareholders of a joint stock company is to make their contribution to the registered capital corresponding to the respective issue rate of the shares. Such contribution must be made within the time limit stated in the articles of association of the company, but in any case within one year after the registration of the company. 42 In case the shareholder should be in delay with the fulfillment of this obligation, he is obliged to pay late payment interest on the respective amount as stated in the articles of association, or if not stated in the articles of association, in the amount of 20 % per year.43 In such case, the board of directors of the company is obliged to inform the shareholder of this fact and to give him an additional period of time to pay the respective amount as stated in the articles of association or within 60 days from the delivery of the board of directors’ decision. In case the shareholder fails to comply with this obligation within this time period or if no time period was specified within 60 days, the company shall exclude the shareholder by a decision of the board of directors. 46 Specific obligations of shareholders result from if a single shareholder controls a joint stock company. In case a single shareholder acquires shares in the company in such an amount that enables the shareholder to control the company, the shareholder is obliged to make an offer to the other shareholders of the company to takeover their shares. The shareholder is also obliged to inform the company of such facts.

40 41 42 43

734

Sec. Sec. Sec. Sec.

179 181 177 177

(8) of the Act No. 513/1991 Coll., Commercial Code, as amended. of the Act No. 513/1991 Coll., Commercial Code, as amended. (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

3. Shareholders

Slovak Republic

47

The aforementioned obligations also apply to shareholders factually controlling the 47 company by acting in concert. All of the aforementioned obligations only apply in case the shares of the joint stock company are publicly traded. Another shareholder’s obligation is the information duty. In case any person acquires 48 or exceeds or decreases the portion on the voting rights of the initial issuer of shares seated in the Slovak Republic, whose shares are accepted to be negotiable on the official market in the Slovak Republic, by certain limits, an obligation to inform the Central Depository of Securities, the Slovak National Bank and the initial issuer in 3 business days arises. If such person fails to comply with this obligation, the legal act is not invalid, but the voting rights connected to the respective shares cannot be performed. b)

General Meeting of the Shareholders

The general meeting of the shareholders is the supreme body of a joint stock company. 49 All major decisions, which affect the rights of the shareholders and the company, are to be taken in the general meeting. The right of the shareholder to attend the general meeting is one of the most important rights of the shareholder. The shareholder may attend the general meeting in person or provide someone with a 50 power of attorney to do so in his name. 44 There are annual ordinary general meetings and extraordinary general meetings of the company. The annual general meeting has to take place at least once a year as often and in such time as stated in the articles of association of the company. 45 The board of directors of the company must convene the general meeting. In case, the company has only a sole shareholder, a general meeting does not take place. 51 All decisions, which fall within the competence of the general meeting, are taken by the sole shareholder instead. As mentioned earlier, all decisions, which may have a substantial impact on the struc- 52 ture of the company or the framework of its business, are to be taken by the general meeting. In particular this applies to all changes of the articles of association of the company. Another very important example of decisions, which are necessarily to be taken by the general meeting, are increases or decreases of the registered capital of the company, including the authorization of the board of directors of the company to increase the registered capital, or the issuance of bonds. The general meeting may further appoint and recall the members of the other two 53 bodies of the company, the board of directors and the supervisory board. With regard to the members of the board of directors, the articles of association of the company may

44 45

Sec. 184 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 184 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

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54

Slovak Republic

II. Joint Stock Company

stipulate that the members may also be appointed and recalled by the supervisory board.46 The general meeting further appoints the liquidator of the company.47 54 The general meeting also approves the individual ordinary and extraordinary financial statements of the company. One of the most important decisions, which has to be taken by the general meeting, is the profit allocation and distribution including a reimbursement for possible loss and the determination of annual royalties. 55 The general meeting further decides on the rules for the remuneration of the members of the board of directors and the supervisory board. 56 Any major decisions, which change the structure of the company, also fall within the competence of the general meeting, such as mergers with other companies, decisions on the division of the company, dissolution of the company and the change of its legal form. 57 It shall also decide on the conclusion of an agreement on the transfer of all assets or the enterprise of the company or any part thereof. 58 The general meeting may approve legal acts, which were made on behalf of the company before its establishment. 59 On the other hand, the general meeting may not take any decisions on matters, which do not fall within its competence by order of law or as stipulated in the articles of association.48 aa)

Necessary Majority

60 The number of shareholder’s votes corresponds to the ratio of the nominal value of his / her share(s) in proportion to the total value of the registered capital of the company. This rule only applies unless the law or the articles of association of the company state otherwise.49 61 As a general rule, the general meeting takes decisions by the simple majority of votes of the present shareholders, if another majority is not required by the articles of association or by law.50 62 The applicable Slovak law requires a majority of at least 2/3 of the votes of the present shareholders for certain decisions of major importance. In general, these are decisions, which may have major impact on the structure of the company or on the rights of the shareholders. In particular, these are all changes of the articles of association of the company. Also, any increase and decrease of the registered capital of the company 46 47 48 49 50

736

Sec. 194 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 219 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Especially Sec. 187 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 180 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 186 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

3. Shareholders

Slovak Republic

63

requires a 2/3 majority of votes. Another example for a major decision of the general meeting, which requires a 2/3 majority of votes, is the dissolution of the company and the change of its legal form. The articles of association can require a higher majority in these cases.51 Decisions, which directly affect the rights of single shareholders, require a 2/3 majority of 63 votes of those shareholders who own the respective shares. This applies to a proposed change of rights connected with certain types of shares and to proposed restriction of the transferability of the inscribed (na meno) shares, if not a higher majority is required by the articles of association.52 bb) Restriction on Shareholders’ Rights to vote

All shareholders are entitled to vote and take decisions in the general meeting.

64

A shareholder shall not be obliged to follow any suggestions or proposals by the com- 65 pany, its bodies or members thereof. Consequently, the agreements, in which the shareholder commits himself to follow orders of the company, the board of directors or the supervisory board or its member(s) when voting in the general meeting, are invalid under Slovak law. The same applies to agreements, under which the shareholder shall be obliged to perform its voting right in a specific way or not at all, if this shall be a consideration for advantages granted by the company.53 The aforementioned restrictions on the performance of the voting rights by shareholders are also invalid, for example, in case they are incorporated in the articles of association. cc) The Course of the General Meeting

First, the general meeting elects its chairman, a recording clerk, two verifiers of the 66 minutes of the meeting and a person responsible for counting the votes. The course of the general meeting is recorded in the minutes of the general meeting. These minutes must necessarily include the business name and seat of the company, place and time of the general meeting, the names of the chairman, the recording clerk, the verifiers of the minutes and the person responsible for counting the votes. They describe the proceedings of the respective items of the agenda, the decisions and any results of the voting. They also must include the objections made by a shareholder, member of the board of directors or supervisory board, if the objecting person requires so. The chairman of the general meeting and the verifiers must sign the minutes. They are to be filed with the company for the whole duration of the company.54 dd) Challenge of Decisions of the General Meeting

Each shareholder (also the managing director, liquidator, bankruptcy trustee or member 67 of the Supervisory Board if any) is entitled to apply for a judicial decision on invalidity of the decision of the General Meeting, if this decision contravenes the law, the Agreement of Association or the Articles of Association. The application must be 51 52 53 54

Sec. Sec. Sec. Sec.

187 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 186 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 186a of the Act No. 513/1991 Coll., Commercial Code, as amended. 188 and 189 of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

737

68

Slovak Republic

II. Joint Stock Company

made within three months after the adoption of the decision. If a shareholder applies for the decision on invalidity, the court can decide on invalidity of the decision of the General Meeting only if the rights of the applicant – shareholder could have been damaged/restricted. The invalidity of the decision, if proclaimed by the court, does not affect the rights achieved by third parties in good faith. The court’s decision on invalidity of the decision of the General Meeting is binding also for third parties.55 68 If a merger or a division of companies has been registered with the Commercial Register, it is possible to challenge the validity of a merger or a division only by applying for a judicial decision on invalidity of the decision of the General Meeting and approval of the respective agreement on merge or division. Such application can be filed only within six months after the merger or division has become effective.56 c)

The Shares of a Joint Stock Company

69 The shares of a joint stock company represent a part of the registered capital of the company. As securities they also represent certain rights and obligations of a shareholder. Under Slovak law these rights of the shareholders may basically not be separated from the securities themselves. The applicable law states only a limited number of rights, which may be transferred separately from the securities. These rights are in particular rights to the payment of the dividend57 or the liquidation balance.58 A shareholder may also separately transfer its priority right to subscribe new shares59 or to convert the convertible bonds to shares.60 d)

Classes of Shares

aa)

Outlay of the Shares

70 The shares may either be issued in physical form61 (in such case it is represented by a share certificate) or in immaterial form.62 In legal theory, this is called the outlay of shares. Immaterial in this context means that the shares are not represented in the form of share certificate but are registered with the Central Depositary of Securities63 and exist only in an electronic form. 71 The share must necessarily contain the business name and the seat of the company, the date of the issue of the share, the nominal value of the share, the information whether it is a bearer share or an inscribed share, in case it is a inscribed share also the identification data of the share’s owner, the amount of the registered capital and the number of 55 56 57 58 59 60 61 62 63

738

Sec. 131 and 183 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 218h of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 178 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 220 (4) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 204a (4) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 160 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. In Slovak: ‘‘listinna´ akcia’’. In Slovak: ‘‘zaknihovana´ akcia’’. In Slovak: ‘‘Centra´lny depozita´r cenny´ch papierov SR’’. Slavomr Cˇauder

3. Shareholders

Slovak Republic

72

all shares of the company as of the issue date and the issue date. The share issued in physical form must also contain the number of share and the signatures of the members of the board of directors entitled to represent the company.64 bb) Form of Shares

Slovak law further distinguishes between inscribed shares65 and bearer shares.66 In legal 72 theory, this is called the form of shares. The inscribed share can be issued either in physical or in immaterial form. The bearer share can be issued in immaterial form only. Inscribed shares in physical form are to be transferred by endorsement and handover of 73 the share certificate.67 A special law rules the transfer of shares issued in immaterial form.68 cc) Type of Shares

Under Slovak law, there are also three different types of shares: common shares,69 74 priority shares.70 In contrary to the Czech law, the employee’s shares are as of January 1. 2004 considered as ordinary shares. Common shares do not include any special right. Priority shares include the priority right to the dividend. In contrast, sometimes they must not grant the shareholder a right to vote in the general meeting. The total of the nominal value of all priority shares of a company may not exceed one half of the registered capital of the company. dd) Collective Shares

Instead of a large number of individual shares certificates, the respective shares of the 75 same type with the same nominal value may also be represented by collective share certificates. Such collective share certificates represent a certain number of individual share certificates, as stated on the share certificate.71 e)

Transfer of Shares

There are different legal requirements for the transfer of shares, which vary with regard 76 to the form and of the share. As already mentioned, inscribed shares issued in physical form are to be transferred by 77 endorsement and handover of the share certificate. The transfer of shares issued in immaterial form (both inscribed and bearer shares) is ruled by a special law. 64 65 66 67 68 69

70

71

Sec. 155 of the Act No. 513/1991 Coll., Commercial Code, as amended. Slovak ‘‘akcie na meno’’. Slovak ‘‘akcie na dorucˇitel’a’’. Sec. 156 (4) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 19-27 of the Act No. 566/2001 Coll., Securities Act, as amended. In Slovak: ‘‘kmenˇova´ akcia’’, especially Sec. 155 (5) of the Act No. 513/1991 Coll., Commercial Code, as amended. In Slovak: ‘‘prioritna´ akcia’’, especially Sec. 159 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 157 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

739

78

Slovak Republic

II. Joint Stock Company

78 The transfer of an inscribed share becomes effective vis--vis the company as of registration in the respective list of shareholders, which is held by the company.72 79 Bearer shares (which can be issued in immaterial form only) and non-material inscribed shares are transferred at the moment of the registration of the transfer with the respective account of the new account holder with the Central Depositary of Securities. 80 The articles of association of the company may restrict the transferability of inscribed shares. In any case transferability may not be completely excluded.73 f)

Acquisition of Own Shares by the Company

81 As a general rule, the company may not subscribe its own shares. A joint stock company under Slovak law may only acquire its own shares if the general meeting of the company decides to acquire shares of the company. This condition may only be waived in case substantial damage threatens the company. In any case the nominal value of these shares may not exceed 10 % of the registered capital of the company. The acquisition of own shares must not lead to the decrease of the core (shareholders’) capital under the amount of the registered capital plus the reserve or other funds. The company must alienate the shares within 18 months. The company may also acquire its own shares for the purpose of their further sale to the employees of the company. Such shares must be alienated within 12 months.74 82 The company may acquire its own shares without fulfillment of the aforementioned conditions only in case the company acquires the shares for the purpose of decrease of the registered capital of the company, if the company became the legal successor of the previous owner of the shares, in order to fulfill the legal obligations or judicial decisions regarding the protection of minority shareholders, if the issue rate of the shares has been paid in full and the company acquires the shares without consideration, etc. These shares must be alienated by the company within three years after their acquisition except for the case the total nominal value of the acquired own shares does not exceed 10 % of the company’s registered capital. 83 Should the company fail to comply with the obligation to alienate the shares within the aforementioned time periods, the company is obliged to decrease its registered capital by the nominal value of the respective shares. In case the company does not comply with this obligation, a court may decide on dissolution and liquidation of the company.75 84 For the time period, in which the company possesses its own shares, the voting rights connected with the shares cannot be performed.76

72 73 74 75 76

740

Sec. 156 (7) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 156 (9) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 161a of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 161b of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 161d (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

4. The Articles of Association

g)

Slovak Republic

85

Other Securities Issued by a Joint Stock Company

The right to the priority subscription of shares of the company may be represented in 85 the form of a priority bond. In contrast, convertible bonds represent the rights of the entitled person to exchange these bonds for the shares of the company. In case the subscriber of shares has not paid off the whole issue rate of the share before the registration of the company into the Commercial Register, the company shall issue an interim certificate. These certificates represent the corresponding subscribed, but not yet paid, shares of the company.77

4.

The Articles of Association

The articles of association of a joint stock company as a special type of agreement 86 constitute the major legal framework for the structure of the company. They govern the relations between the shareholders, the board of directors and the supervisory board as well as the major characteristics of the company and its shares. a)

Mandatory Content

Under Slovak law, the articles of association of a joint stock company must state the 87 name, under which the company shall conduct its business. They shall also provide the seat of the company and the scope of the company’s business. The articles of association also have to describe the registered capital of the company and its shares. Beside the exact amount of the registered capital, the method of repayment of the issue rate also has to be stated. Concerning the shares of the company, the articles of association must stipulate the number and the nominal value of the shares, their outlay and their form. In addition, if the company has issued both the inscribed and the bearer shares, the articles of association also have to stipulate, how many of the company shares are inscribed and how many are bearer shares. The articles of association also necessarily have to further describe the regulations 88 concerning the general meeting of the company. In particular the procedure, how to convene the general meeting has to be provided, as well as the competence of the general meeting and the procedure of its decision-making. Mandatory content of the articles of association of a joint stock company is also the 89 number of the members of the board of directors of the company as well as the number of the members of the supervisory board. They should also specify the term of the function of the members of both company’s bodies. In addition, the articles of association shall determine the competence of the board of directors and the supervisory board and the method of their decision-making. The amount of the reserve fund of the company and the method of its replenishing also 90 have to be specified in the articles of association. They shall describe the method of 77

Especially Sec. 176 of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

741

91

Slovak Republic

II. Joint Stock Company

allocation of the profit of the company as well as the rules governing the increase and decrease of the registered capital of the company. Further, the articles of association must describe the consequences of the breach of the shareholder’s obligation to pay off its subscribed shares. They shall also determine the procedure concerning any change or amendment of the articles of association.78 b)

Optional Provisions

91 In addition to the mandatory content, the articles of association may stipulate a large variety of optional provisions. The Slovak Commercial Code in numerous cases enables the parties to chose from different possibilities to regulate the relations between shareholders and the company under the condition that such case is expressly stipulated by the articles of association. The Commercial Code namely mentions the procedure of issuance of different types of shares, their identification, number and rights connected to them. The articles may also state the rules governing the issuance of the bonds and their rights or the rules governing the favored acquisition of shares by the employees of the company. c)

Change of the Articles of Association

92 The articles of association may be changed only by decision of the general meeting, which procedure corresponds to the importance of this document. Every time the articles of association are changed, the board of directors is obliged to restate the full new wording of the articles.79 93 Every amendment of the articles of association requires registration into the Commercial Register. This requirement does not necessarily mean that changes always become effective as of registration. Only certain changes become effective as of registration into the Commercial Register, such as the increase or decrease of the registered capital, changes of the form or type of the shares or the restriction of transferability of the shares. In contrast, some changes require for their effectiveness only the decision of the general meeting, or may even be effective later if this is stated by such decision. 94 Any change to the articles of association must necessarily be made in the form of a notarial deed. d)

Increase and Decrease of the Registered Capital of the Joint Stock Company

aa)

Increase of the Registered Capital

95 An increase of the registered capital of a joint stock company may be decided only by the general meeting. 96 There are basically two possibilities how to increase the registered capital. It may be realized by the subscription of new shares or from the company’s own sources. 78 79

742

Sec. 173 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 173 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

4. The Articles of Association

Slovak Republic

97

The new shares may be subscribed by monetary contributions of the subscriber. In such 97 case the shareholder is obliged to pay the part of the nominal value of the shares that is determined by the general meeting, which must be in any case at least 30 %. 80 Should this condition not be fulfilled, the subscription is ineffective. New shares may be subscribed also by non-monetary contributions. A contribution in 98 kind must be approved by the general meeting and in contrary to the monetary contribution must be fully paid before the registration of the registered capital’s amount to the Commercial Register.81 If the registered capital shall be increased by monetary contribution, each shareholder 99 of a joint stock company has a special priority right to subscribe the new shares. Such right corresponds to the shareholder’s portion on the registered capital of the company.82 This right cannot be validly restricted or excluded by the articles of association. However, the decision of the general meeting on the increase of the registered capital may restrict or exclude this right if it is in the interest of the company. The restriction or exclusion must apply to all shareholders to the same extent. 83 After the subscription of shares corresponding to the intended increase and payment of 100 at least 30 % of their nominal value or after the contribution in kind has been made, the board of directors is obliged to submit to the Commercial Register an application for registration. The increase becomes effective as of the registration with the Commercial Register. If such application is not filed with the Commercial Registry within 90 days after the shares’ subscription, the subscription is invalid and the company has to pay back all contributions which have been paid including interest. 84 The second way to increase the registered capital is from own sources of the company. 101 Such increase is made from the net profit of the company or other sources as stated in the financial statement of the company. In this case the increase is shared by all shareholders in the proportion of the nominal value of their shares. An increase of the registered capital from own sources may either be in the form of the 102 issuance of new shares and their allocation among the shareholders free of charge or may be realized by the increase of the nominal value of the existing shares. 85 In certain cases and under special conditions the general meeting may authorize the 103 board of directors to decide on the increase of the registered capital. 86

80 81 82 83 84 85 86

Sec. Sec. Sec. Sec. Sec. Sec. Sec.

175, 59 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 59 (2), 202 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. 204a (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 204a (5) of the Act No. 513/1991 Coll., Commercial Code, as amended. 206 of the Act No. 513/1991 Coll., Commercial Code, as amended. 208, 209 of the Act No. 513/1991 Coll., Commercial Code, as amended. 210 of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

743

104

Slovak Republic

II. Joint Stock Company

bb) Decrease of the Registered Capital

104 The decrease of the registered capital is decided, as well as the increase, by the general meeting. The basic rule governing this procedure is that the registered capital may never decrease under the limit stated by the law, i.e. in this case under SKK 1,000,000 (or EUR 25,000). 105 A decrease of the registered capital may have a major impact on the position of the company’s creditors. Consequently, the Slovak Commercial Code includes several provisions protecting the creditors. As a general rule, the company must always ensure that the recoverability of the receivables of the company’s creditors shall not worsen by such decrease. With regard to this, the board of directors is obliged within 30 days from the effectiveness of the decision on the decrease of the registered capital to inform third parties and all known company’s creditors of this fact. The creditors are thereafter within 90 days from such notification entitled to require additional security for their non-paid receivables, which have not been due at the time of delivery of the notification.87 106 The decrease of the registered capital can be realized by the decrease of the nominal value of the shares, which must be made proportional in all shares of the company. The other possibility to decrease the registered capital is to withdraw shares from circulation or to abandon the issuance of the shares in case the subscribers are in delay with payment of their respective nominal value. 88

5.

The Board of Directors89

a)

Members of the Board of Directors

107 As of January 1. 2002, no specific number of members of the board of directors is set by the law. However, the articles of association shall mandatory state a number of board members that the company shall be managed by. 108 The members of the Board of Directors are appointed and recalled by the general meeting. Alternatively, the articles of association may stipulate that the supervisory board shall make appointments and recall. The length of a single form of the members of the board of directors is determined by the articles of association and may be a maximum of 5 years. 90 109 The relationship between a single member of the board of directors and the company is governed by a so-called “agreement on performance of function”.91 Such agreement 87 88 89 90 91

744

Sec. 215 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 211 and following of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 191-196a of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 194 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 66 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended – “zmluva o vy´konu funkcie’’. Slavomr Cˇauder

5. The Board of Directors

Slovak Republic

110

requires written form and must be approved by the general meeting or, if the articles of association state otherwise, by the supervisory board. In case such agreement is not concluded, the legal provisions regarding the mandate agreement shall govern the relationship between the member and the company. 92 A member of the board of directors may also be a foreigner. For this purposes a resident 110 permit is required. This rule does not apply to citizens of the European Union. b)

Management and Representation

The board of directors is a statutory body of the company. It is the supreme management 111 part of the company and entitled to decide on all issues concerning the company, unless the law or the articles of association expressly reserve the respective rights to other bodies of the company. Unless stipulated otherwise in the articles of association, each member of the board of 112 directors is entitled to act on behalf of the company independently.93 Such right to act on behalf of the company may be restricted by either the articles of association, a decision of the general meeting or the supervisory board. However, such restriction is not effective towards third parties.94 In any case the members and the manner how they act on behalf of the company must be registered in the Commercial Register. Basically, the board of directors is obliged to observe the rules and instructions approved by the general meeting. The board of directors is responsible for the management of the company. At least once 113 in an accounting period or in a time stated by the articles of association the board of directors has to submit to the supervisory board a report on the major business activities of the company and the state of the company’s assets.95 The members of the board of directors are obliged to act with proper care, including 114 proper professional care, on behalf of all shareholders and to keep all confidential information secret. Should a member cause any damage to the company, he shall be liable for such damage. Any agreement, which would exclude or restrict his liability in this respect, is invalid.96

92 93 94 95 96

Sec. Sec. Sec. Sec. Sec.

566-576 of the Act No. 513/1991 Coll., Commercial Code, as amended. 191 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 191 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 192, 193 of the Act No. 513/1991 Coll., Commercial Code, as amended. 194 of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

745

115

Slovak Republic

6.

Supervisory Board97

a)

Members of the Supervisory Board

II. Joint Stock Company

115 The supervisory board of a joint stock company must have at least three members; the number of members should be divisible by three. 116 In case the company has more than fifty employees, two third of the members of the supervisory board are appointed by the general meeting and one third is elected by the employees. Only the employees may also recall the members appointed by the employees. In case the company has less than fifty employees the general meeting has the right to elect and dismiss all members of the supervisory board. 117 The articles of association state the functional period of the members. However, a single term cannot exceed five years. 118 The members of the supervisory board must comply with the same conditions as the members of the board of directors.98 The members of the supervisory board further may not simultaneously perform the function of the member of the board of directors, a proxy or a person entitled to act on behalf of the company according to the Commercial Register. b)

Competence

119 The main objective of the supervisory board is to oversee the performance of the board of directors and the business activity of the company. In order to perform this function, the supervisory board is entitled to inspect all documents concerning the activity of the company and control if the accounting is kept in accordance with law and real state of the company. 99 120 One of the most important functions of the supervisory board is to review the ordinary, extraordinary and consolidated financial statements of the company as well as the proposals on allocation of profit or loss. 121 The supervisory board is entitled to convene the general meeting. The members of the supervisory board attend the general meeting and are obliged to acquaint the general meeting with the results of their control activity. 122 The articles of association of the company may also stipulate that the supervisory board shall be entitled to elect and dismiss the members of the board of directors. 123 The decisions of the supervisory board are adopted by the majority of votes as specified in the articles of association, if the majority of all votes do not specify the majority. 97 98 99

746

Sec. 197-201 of the Act No. 513/1991 Coll., Commercial Code, as amended. Compare Section 5. Sec. 197 of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

7. Selected Capitalization and Liability Questions

7.

Selected Capitalization and Liability Questions

a)

Capitalization of the Receivable100

Slovak Republic

124

Capitalization of receivables under Slovak law is considered to be a non-monetary 124 contribution to the registered capital of a company in the form of a set-off of the respective claim of the shareholder vis--vis the company. b)

Liabilities of the Joint Stock Company

In general a joint stock company is a legal entity and thus is fully liable for its actions 125 with all its assets. In contrary to other forms of companies in the Slovak Republic, the shareholders of a joint stock company do not guarantee the obligations of the company during its existence. c)

Special Relations Between the Company and the Members of Its Bodies

The possible abuse of the close relations between the company and single members of 126 its board of directors or authorized proxies or related persons require special provisions regarding possible advantages in favor of such persons. The granting of loans to a member of the board of directors or the company’s authorized 127 proxy or a person entitled to act on behalf of the company or persons related to them is subject to certain restrictions. A loan agreement or any agreement securing any obligation or any agreement granting a using rights to the company’s property concluded with such person may be concluded only with the prior approval of the supervisory board and under conditions usual in normal business relations.101

8.

Accounting

a)

Financial Statements

All companies, as subjects obligatory registered with the Commercial Register, have to 128 have the double entry bookkeeping. A joint stock company is obliged to maintain proper bookkeeping in accordance with Slovak accounting standards, ruled by the Act No. 431/2002 Coll., Accounting Act. All entrepreneurs (legal entities, foreign entities, natural persons – entrepreneurs and/ 129 or all individually earning natural persons) have to prepare a yearly financial statement.102 Financial statements of joint stock companies have to be certified by an

100 101 102

Especially Sec. 59 (5) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 196a of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 17 and following of the Act No. 431/2002 Coll., Accounting Act, as amended.

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130

Slovak Republic

II. Joint Stock Company

auditor. Joint stock companies also have to prepare Annual Report the compliance of which with the financial statement has to be certified by an auditor. The financial statement is always included in the Annual Report.103 130 The Commercial Code distinguishes the ordinary financial statement that is made regularly as of the last day of the accounting year and the extraordinary financial statement required for special events. The financial statement contains the balance sheet, a report on profit and loss and annexes evidencing this. It may also contain a summary of cash flow or a summary of the change of the core capital. 131 The yearly individual ordinary, extraordinary, consolidated and continuous financial statement and the Annual Report have to be filed with the Document Collection of the Commercial Register.104 b)

Audit Requirements

132 Financial statements of joint stock companies have to be certified by an auditor. Joint stock companies also have to prepare Annual Report the compliance of which with the financial statement has to be certified by an auditor. c)

Reserves

133 A joint stock company, at the time of its establishment, is obliged to create a reserve fund in amount of at least 10 % of its registered capital. Then, a joint stock company is obliged to replenished annually the reserve fund by the sum as stated in the articles of association, at least by 10 % of the company’s net profit, until the reserve fund reaches the amount as stated in the articles of association or, at least, 20 % of the registered capital.105 134 The disposition with the reserve fund pertains to the board of directors if not stated otherwise in the articles of association.

9.

Taxation

135 Through the new Act No. 595/2003 Coll., Income Tax Act, as amended, the flat rate in amount of 19% has been introduced. The income tax of all natural persons and legal entities amounts to 19%, independent from the amount of their incomes or turnover. This rate applies also to the incomes from the profit shares. Also the value added tax amounts to 19% according to Act No. 289/1995 Coll., Value Added Tax Act, as amended.

103 104 105

748

Sec. 20 of the Act No. 431/2002 Coll., Accounting Act, as amended. Sec. 1 g) of the of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 217 of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

10. Termination of the Business

Slovak Republic

136

Other taxes such as consumption tax, real estate tax, real estate transfer tax and others 136 may be applicable.

10. Termination of the Business A company is being cancelled, i.e. ceases to exist as of the day of its deletion from the 137 Commercial Register.106 Before its cancellation a company has to be dissolved, either with or without winding up if its property goes over to its legal successor. The company’s winding up is also not required if the company has no property, if the application for declaration of bankruptcy has been refused for the lack of company’s property, if the bankruptcy proceedings have been cancelled for the company’s property is not sufficient for the costs and remuneration of the bankruptcy administrator or if there is no property left after the end of bankruptcy proceedings.107 a)

Dissolution of the Company

A company is dissolved: (a) as of the expiry of the period of time it was founded for; (b) as of the date specified in a shareholders’ decision or a decision of the competent company’s body on company’s dissolution or as of the date of adoption such decision. Shareholders or the competent company’s body can cancel their decision on the dissolution before the distribution of the winding up-balance has been started. In this case, if a company’s dissolution is voluntary, also company’s merger or a division of can be decided; (c) as of the date stated in a judicial decision on the company’s dissolution, otherwise as of the date such decision comes into legal force; (d) as of the termination of the bankruptcy proceeding after the distribution schedule has been fulfilled or as of the termination of the bankruptcy proceeding for the company’s property is not sufficient for the costs and remuneration of the bankruptcy administrator or as of the refusal of the application for declaration of bankruptcy for the lack of company’s property; (e) for other reason set by law.108

138

The court shall, upon a state body’s or a legally interested person’s proposal or its own 139 suggestion, decide on the dissolution of a company under the following conditions: (a) the Shareholders’ meeting did not take place in the respective calendar year or the company’s bodies have not been established for longer than three months; (b) the company loses the right to conduct business; (c) the conditions set by law for the establishing of a company are not fulfilled; (d) the company fails to create or supplement the obligatory reserve fund as set by law;

106 107 108

Sec. 68 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 68 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 68 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended.

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Slovak Republic

II. Joint Stock Company

(e) the company fails to comply with the Sec. 56 (3) of the Commercial Code, i.e. the company conducts business that only natural persons are entitled to and it is not secured that this business activity should be conducted by a qualified person to it; (f) the company failed to file the individual financial statement with the Documents Collections for two accounting periods at least.109 140 Before the dissolution of a company by judicial decision as described above, the court shall grant to the company a time limit in which the insufficiency being the reason for the proposed dissolution can be removed. Before the dissolution of a company the court shall also discover whether the company has property sufficient for the costs and remuneration of the bankruptcy administrator or not. In the first case the court decides on the dissolution of the company and its winding up, in the latter case the court decides on the dissolution without a winding up. After the decision on the dissolution of a company without winding up comes into legal force, the court deletes the company from the Commercial Register.110 b)

Liquidation of the Company (Winding-Up)

141 The company enters into the winding up process as of the day of its dissolution, if not set otherwise by law. During the winding up, the company’s name shall include the identification “in winding up” (“v likvidcii”).111 142 The statutory body as the liquidator executes the winding up, if not stated otherwise by law, Agreement of Association or Articles of Association. If there is no member of the statutory body or if the liquidator is not appointed by the Shareholders’ meeting without unreasonable delay, the court will appoint the liquidator. The court may appoint any of the shareholders or statutory body or its member even without his consent. The liquidator appointed by court cannot resign, but can apply for the recall if he cannot be fairly demanded to exercise the function.112 While there is no liquidator or until the liquidator is appointed, the statutory body or its member have to exercise the function.113

11. Insolvency 143 A new Act No. 7/2005 Coll. on bankruptcy and restructuring has been adopted on December 9, 2004. The main part of the act becomes effective as of January 1, 2006. The new act shall speed up and improve the conditions for the bankruptcy proceeding. For example, a time period of maximum 10 business days has been set for the issue of

109 110 111 112 113

750

Sec. Sec. Sec. Sec. Sec.

68 (6) of the Act No. 513/1991 Coll., Commercial Code, as amended. 68 (7) through (9) of the Act No. 513/1991 Coll., Commercial Code, as amended. 70 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 71 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 68 (5) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

12. Choice of Seat Outside the Slovak Republic

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144

bankruptcy order, the effects of the bankruptcy order has been set as of the day of the publication of the court’s decision on bankruptcy order in the Commercial Register, the bankruptcy trustee is now obliged to pay the financial funds to the creditors without unreasonable delay after each realization of a part of the respective property, the legal terms have been defined more clearly etc. Also the responsibility of the bankruptcy trustees shall be increased. The new Act No. 8/2005 Coll. on bankruptcy trustees has been adopted. The Ministry 144 of Justice shall issue a decree containing the specimen application forms for claims. In the new act also informal restructuring has been enacted which shall be an alternative for the judicial bankruptcy proceedings. Negative is the decreasing of the creditors’ influence and competences in the proceedings.

12. Choice of Seat Outside the Slovak Republic A foreign legal entity founded for the business purpose can move its seat from abroad 145 into the Slovak Republic if the law of European Communities or an international agreement which is binding for the Slovak Republic and was duly published as required by law allows so. The same applies to the choice of seat of a Slovak legal entity outside the Slovak Republic.114 The change of seat is effective as of the registration with the Commercial Register. 146 Internal circumstances of such legal entity and the responsibility of its shareholders against third parties are governed by the law of the state according to which is has been founded. The shareholders’ responsibility cannot be lower than according to the Slovak law applying for the same or similar legal entity.

III. Limited Liability Company 1.

Basic Characteristic of a Limited Liability Company

a)

Typical characters of a Limited Liability Company

A Slovak limited liability company115 (hereinafter referred to as the “company”) is 147 regulated by the Slovak Commercial Code,116 and by special regulations under specific laws.117 The registered capital of the company is made up of the shareholders’ contributions. The contributions have to be paid under the conditions set by law. Each shareholder is liable for the obligations of the company up to the amount of its unpaid 114 115 116 117

Sec. 26 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. In Slovak: ‘‘spolocˇnost’ s rucˇenı´m obmedzeny´m’’. Act No. 513/1991 Coll., Commercial Code, as amended, esp. Sec. 105-153. E.g. Act No. 530/2003 Coll., Commercial Register Act, as amended; Act No. 455/1991 Coll., Trade Act, as amended.

Slavomr Cˇauder

751

148

Slovak Republic

III. Limited Liability Company

contribution as registered with the Commercial Register. Further, the company is liable for its obligations with its entire assets.118 148 The business name of the company must include the identification “Limited Liability Company” (“spolocˇnost' s rucˇenm obmedzeny´m”), so called legal form supplement. The abbreviation “spol. s r.o.” (“Lim. Liab. Comp.”) or “s.r.o.” (“L.L.C.”) is also sufficient.119 b)

Basic Structure of a Limited Liability Company

149 A company’s bodies are: the shareholders’ meeting, managing directors and the supervisory board (not mandatory). c)

Number of Shareholders

150 The shareholders perform their rights in the shareholders’ meeting. The shareholders participate on the profits and loss of the company, according to the principles set by law and the company’s statutory rules. 151 A limited liability company may be founded by a single shareholder, both a person or a legal entity.120 However, a limited liability company with a sole shareholder cannot be a single founder or single shareholder of another limited liability company. Further, one person may become a single shareholder of a maximum of three limited liability companies.121 152 The maximum number of shareholders permitted by the Slovak law is fifty.122 d)

Registered Capital

153 The minimum amount of the registered capital is SKK 200,000.123 The shareholder’s contribution must amount to at least SKK 30,000. 154 Each shareholder may participate in the founding of the company with only one contribution. The amount of each shareholder’s contributions can differ, but has to be divisible by 1,000. The contribution can be either monetary or in kind or a combination of the two.124

118 119 120 121 122 123 124

752

Sec. Sec. Sec. Sec. Sec. Sec. Sec.

106 of the Act No. 513/1991 Coll., Commercial Code, as amended. 107 of the Act No. 513/1991 Coll., Commercial Code, as amended. 105 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 105a (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 105 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. 108 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 109 of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

2. Formation of a Limited Liability Company

e)

Slovak Republic

155

Significance of the Limited Liability Company in Slovak Business Life

According to the Slovak Statistics Office, there were 52,673 limited liability compa- 155 nies and 4,135 joint stock companies registered in Slovakia in 2003.125 These figures prove that the limited liability company is by far the most common company form.

2.

Formation of a Limited Liability Company

a)

Formation Procedure

The formation of a limited liability company under Slovak law, equally as under Czech 156 law, may be divided into two major parts. First the foundation by the shareholders and second the registration in the Commercial Register. The company is founded by conclusion of an Agreement of Association. If founded by 157 a single person, it is founded by conclusion of a Deed of Foundation. These documents do not require the form of a notarial deed, but must be in writing and the signature(s) of the founder(s) must be notarized.126 The company can (but must not) adopt Articles of Association containing the rules on the internal organizational structure of the company.127 If not stated otherwise at the founding of the company, it is found for an indefinite 158 period of time.128 b)

Registration Procedure

The company is established as of the date of its registration with the Commercial 159 Register. The application for the registration has to be filed within ninety days from

125

1993

1998

2003

Legal entities

Number

28,522

60,334

64,420

Trading companies

20,850

51,487

57,647

1,691

3,916

4,135

18,147

46,339

52,673

Cooperatives

1,922

1,917

1,517

State enterprises

1,049

149

37

Joint Stock Companies Limited Liability Companies

126 127 128

Natural persons – entrepreneurs

282,894

295,801

329,720

Tradesmen

264,090

263,733

306,356

Freelancers

1,172

12,946

13,044

Sec. 57 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 110 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 62 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

753

160

Slovak Republic

III. Limited Liability Company

the foundation of the company or from the delivery of the document(s) proving the right to conduct trade (trade license) or other undertaking.129 160 Prior to the filing of the application for the registration of the company with the Commercial Register, 30 % of each monetary contribution has to be paid in and prior to the registration of the registered capital amount,130 all contributions in kind have to be transferred in full.131 The total value of the paid in monetary contributions together with the value of the transferred contributions in kind must amount to at least SKK 100,000.132 If a limited liability company is founded by a sole shareholder, the sole shareholder is obliged to fully pay in the entire amount of the registered capital prior to the registration with the Commercial Register.133 161 The contributions or its parts that have been paid in prior to the registration of the company are administered either by one of the founder(s) authorized in the Agreement of Association or by a bank or a foreign bank’s branch as a contributions’ administrator.134 162 The Commercial Register Act governs the registration procedure.135 The act indicates which data are to be registered, which documents must contain the Documents Collection, etc. 163 The application for the registration has to be filed on a special form. The application for registration with the Commercial Register has to be signed and filed by all managing directors. The signatures of the applicants or their authorized representatives must be notarized.136 164 The register court shall prove prior to the registration whether the following conditions have been fulfilled:137 – the application has been filed by the entitled person; – the application is complete;138 – all required documents are attached to the application and in form as required by law; 129 130 131 132 133 134 135 136 137

138

754

Sec. 62 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 111 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 59 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 111 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 111 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 60 of the Act No. 513/1991 Coll., Commercial Code, as amended. Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 5 (3) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 6 (1) and Sec. 7 (3) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. The following applications are considered to be incomplete: applications not filed on the form as required; applications not containing all required data; applications containing solely data the registration of which is not required by law; incomprehensible applications (Sec. 6 (2) a) through d) of the Act No. 530/2003 Coll., Commercial Register Act, as amended). Slavomr Cˇauder

2. Formation of a Limited Liability Company

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165

– the data in the application correspond with the data stated in the attached documents; – the court’s fee has been paid;139 – the Agreement of Association contains all requirements; – not more than fifty shareholders are stated in the Agreement of Association; – the amount of the registered capital and of each shareholder’s contribution paid in corresponds with the legal requirements; – the legal entity being a sole founder / shareholder of a company is owned by more than one shareholder; – the natural person being a sole founder / shareholder of a company is not a sole shareholder of more than two other limited liability companies; – the Agreement of Association has been signed by all founders and their signatures were notarized.140 The court shall further prove whether the proposed business name is not identical 165 with other existing company names, regardless of the legal form supplement. The court shall also prove whether the proposed company’s business scope corresponds with the document(s) proving the right to conduct trade (trade license) or another undertaking. Further documents to be submitted to the Commercial Register are:141 – Agreement of Association/Deed of Foundation, including the respective powers of attorney (including all latter amendments); – full wording of the Agreement of Association/Deed of Foundation if amended;142 – trade licenses; – document proving appointment or dismissal of managing director, proxy, and other persons, including their name, address, date of birth, birth number (in case of a foreign person the birth number is required only if granted) and the specimen signature; – the expert’s report on evaluation of the contribution in kind, if any; – confirmation of the contribution’s administrator on the shareholder’s contribution being paid in full or partly; – affidavit of the managing director(s) on their capability to perform the function, extract from the criminal register.

139 140 141 142

Sec. 6 (1) a) through f) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 7 (3) a) through f) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 3 (1) and of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Drawing up the full wording of the Agreement of Association after incorporation of its changes agreed during the existence of the company, including the language and style adaptation, corresponding to the terminology of the Commercial Code, constitutes neither a cancellation of the Agreement of Association nor its change for which the consent of all shareholders is necessary. (Decision of the Supreme Court of the Slovak Republic, dated March 4, 1998, No. 2 Obo 359/97).

Slavomr Cˇauder

755

166

167

Slovak Republic

III. Limited Liability Company

167 The application for the registration can not be withdrawn.143 There is no remedy against the decision on the registration that has been made according the filed application.144 168 If all conditions concerning the application have been fulfilled, the respective court registers the company within five working days after the application has been filed. The register court confirms the registration by a written confirmation delivered to the applicant with the excerpt from the Commercial Register.145 169 In case that conditions concerning the application have not been fulfilled; the respective court will reject the registration and notify the applicant on such rejection. The applicant may object the rejection within 15 days as of delivery of the notification. The register court judge decides on the objections within 10 working days after their delivery. The judge either accepts the objections and executes the registration or rejects the objections. The applicant may appeal against the rejection of its objections.146 170 In case the registration is approved by the Commercial Register, this decision is published in the Business Bulletin.147 Upon publication in this Bulletin, the registration becomes effective vis--vis third parties. 171 Before that the company does not exist. In case someone acts on behalf of the company in the time period between the formal start of the establishment process and its completion, the basic rule is that this person is personally liable for any obligation that results from such action. Nevertheless, the shareholders or a competent body of the company may approve the respective action within three months after the registration of the company in the Commercial Register. In this case, an obligation resulting from such activities shall be considered to be binding for the company as of the time in which the respective person has acted.148 c)

Approval Requirements

172 In general, a company is a legal entity established for a business purpose. A limited liability company and the joint stock company may be established also for other purposes. 173 Usually, in order to start its business, the company must be in possession of further documents that prove that it has the necessary permissions to conduct its proposed business. In most cases, these are trade licenses. Under the applicable Slovak law149 there are numerous different kinds of trade licenses. Such trade licenses may be oper143 144 145 146 147 148 149

756

Sec. 5 (4) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 8 (1) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 8 (1) and (2) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Sec. 8 (3) through (5) of the Act No. 530/2003 Coll., Commercial Register Act, as amended. Government decree No. 42/2004 Coll., on the Business Bulletin. Sec. 64 of the Act No. 513/1991 Coll., Commercial Code, as amended. Act no. 455/1991 Coll., Trade Licence Act as amended. Slavomr Cˇauder

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174

ated by the legal entity only through the responsible person who must fulfill certain conditions. General conditions are: age of eighteen, capacity to legal acts and moral integrity. In special cases, the trade licenses require special knowledge, professional training or education. In respect to limited liability companies, it is preferable that the function of the responsible person is performed by the managing director(s) of the company. d)

Shelf Companies

Shelf companies, i.e. companies founded in advance for the purpose of a faster access to 174 the Slovak market, are loosing their importance because of the faster formalized registration procedure. The new procedure of registration with the Commercial Register allows completing a foundation and establishment of a limited liability company within 10 days. e)

Costs and Duration

Contrary to the provisions of the Czech law, under the Slovak Commercial Code the 175 Agreement/Deed of Foundation must not have a form of a notarial deed, but must be in writing and the signature(s) of the founder(s) must be notarized. For the notarization of one person’s signature the notary’s fee in amount of SKK 60 has to be paid.150 For composing the Agreement of Association or for the approving of the Shareholders’ 176 meeting’s procedure the notary’s fees have to be paid, in the amount derived from the value of the respective subject-matter: 2% from the value up to SKK 100,000, plus 1% from the value exceeding SKK 100,000 up to SKK 500,000, plus 0.5% from the value exceeding SKK 500,000 up to 1,000,000 etc.151 Other fees that have to be taken in account are fees for the application to the Com- 177 mercial Register. The lump sum for the registration or a deletion of a company is SKK 10,000,152 fees for any change amount to SKK 1,500.153, 154 f)

Company Stationary

The stationary to be used by the limited liability company must provide the business 178 name of the company, the registered seat of the company and its identification number as well as an exact specification of its registration with the Commercial Register. If the

150

151

152 153 154

Part C, sec. 3. of the Annex to the Ministry of Justice’s decree No. 31/1993 Coll., on the notaries’ remuneration and fees, as amended. Part A, sec. 4. of the Annex to the Ministry of Justice’s decree No. 31/1993 Coll., on the notaries’ remuneration and fees, as amended. Cca. EUR 260. Cca. EUR 38. Item No. 17 of the Act No. 71/1992 Coll., on the courts’ fees and the fees for Criminal Register excerpts, as amended.

Slavomr Cˇauder

757

179

Slovak Republic

III. Limited Liability Company

amount of the registered capital is indicated in the company’s stationary (not mandatory), also the amount of the paid in contributions has to be indicated.155

3.

Shareholders

a)

Rights and Obligations of the Shareholders of a Limited Liability Company

aa)

Basic Rights

179 Shareholder has the right to the profit sharing (calculated as a proportion of the nominal value of shareholder’s share and the nominal value of the shares of all shareholders), if not stated otherwise in the Agreement of Association.156 Only the net profit decreased by the reserve fund’s allocations, other obligatory funds allocations and by the unpaid loss from the past and increased by the undistributed profit from the past can be distributed.157 The company must pay neither the interest from the contributions or the advance payments for the profit shares. The shareholders must return the profit share paid in conflict with these regulations. The managing directors who consented to the profit distribution infringing the above stated regulation are liable for the payback of the paid profit shares jointly.158 180 During the existence of the company, the shareholders cannot request any repayment of their contribution.159 181 As a general rule, the right of the shareholders to participate in the management of the company and their corresponding right to information on the company is limited to their right to participate in the shareholders’ meeting. The shareholder may require information and explanations from the managing directors in the shareholders’ meeting regarding the management and business activities of the company. They are also entitled to inspect any documents of the company and control the data included therein.160 182 Further, the shareholder is entitled to bring an action for damages on behalf of the company against the managing director and an action against any shareholder who is in delay with payment of its contribution to the registered capital of the company.161 183 Decisions which were taken by the shareholders’ meeting may be challenged by each shareholder, managing director, liquidator of the company and administrator of bankruptcy assets as well as a member of the supervisory board of the company, if any. The 155 156 157

158 159 160 161

758

Sec. 3a (1) and (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 123 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 123 (2) in connection with sec. 179 (3) and (4) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 123 (4) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 123 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 122 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 122 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

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Slovak Republic

184

aforementioned may challenge the validity of the decisions at court. Such request must be based on the fact that the respective decision is in conflict with the applicable Slovak law or the shareholders’ agreement, foundation deed or the articles of association. Any right to challenge decisions of the shareholders’ meeting must be exercised within 3 months from the day when the shareholders’ meeting took place. The invalidity of the decision, if proclaimed by the court, does not affect the rights achieved by third parties in good faith. The court’s decision on invalidity of the decision of the Shareholders’ meeting is binding also for third parties.,162, 163 The shareholders also have a right to any liquidation balance of the company. In case 184 the company is liquidated, such liquidation balance is to be allocated among to the shareholders in the proportion of their ownership interests after claims of all known company’s creditors have been settled.164 bb) Basic Obligations

The major obligation of the shareholders of a limited liability company is to make their 185 contribution to the registered capital within the term set by law or by Agreement of Association, however the contribution has to be paid in within five years after the establishing of the company or after shareholder’s entry into the company. The managing director(s) is (are) obliged to announce the full payment of each contribution to the register court without unreasonable delay.165 The shareholder cannot be released from its duty to pay in its contribution. In case the shareholder should be in delay with the fulfillment of this obligation, he is 186 obliged to pay late payment interest on the respective amount as stated in the shareholders’ agreement, or if not stated in the shareholders’ agreement, in the amount of 20 % per year. Should the shareholder fail to comply with this obligation he can be excluded under certain conditions.166 cc)

Shareholders’ Meeting

The shareholders’ meeting is the supreme body of a limited liability company. It decides 187 on the most important issues regarding the company, i.e.: – approves the acts made by the persons acting on behalf of the company prior to its registration; – approves the (ordinary and extraordinary) financial statements and decides on the profit and loss distribution; – approves the Articles of Association and its amendments, if any;

162 163

164 165 166

Sec. 131 of the Act No. 513/1991 Coll., Commercial Code, as amended. In the proceeding regarding the invalidity of the decision of the Shareholders’ meeting, the company, not the individuals who have voted on the Shareholders’ meeting, shall be the defendant. (Decision of the Supreme Court of the Slovak Republic, dated May 27, 1998, No. 4 Obo 71/97). Sec. 153 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 113 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 113 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

759

188

Slovak Republic

III. Limited Liability Company

– approves any amendments to the Agreement of Association;167 – approves upon registered capital increase or decrease and on the contributions in kind; – approves appointment, dismissal and remuneration of the managing director(s); – approves appointment, dismissal and remuneration of the members of the supervisory board, if any; – decides on the exclusion of a shareholder; – decides on the dissolution of the company or change of its legal form; – approves the agreement on purchase of the enterprise or its part; – or on other matters as stipulated by law or Agreement of Association or Articles of Association. 188 The shareholders’ meeting can reserve to decide on certain matters, which are otherwise decided by other company’s bodies.168 189 Shareholder participates in the shareholders’ meeting in person or by an authorized representative; the respective power of attorney must be granted in writing. Neither managing director nor member of the supervisory board may represent the shareholder at the shareholders’ meeting.169 190 Unless the Agreement of Association states otherwise, the quorum needed to take decisions in the shareholders’ meeting is reached, if shareholders who possess at least one half of the votes are present. For these purposes each shareholder shall have one vote to each SKK 1,000 of its contribution to the registered capital of the company 191 As a general rule, the shareholders’ meeting takes decisions with the simple majority of votes of the present shareholders. 192 The applicable Slovak law requires a majority of at least 2/3 of the votes of the present shareholders for certain decisions of major importance. In general, these are decisions which may have major impact on the structure of the company or on the rights of the shareholders. In particular, these are all changes of the shareholders’ agreement of the company. Also, any increase and decrease of the registered capital of the company requires a 2/3 majority of the vote.170 167

168 169 170

760

The change of the Agreement of Association must be approved either by all shareholders or by the Shareholders’ meeting if entitled by law or Agreement of Association. (Sec. 141 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended.) It means that the majority, not all shareholders, can under certain conditions make the change of the Agreement of Association. If the proposed change of the Agreement of Association enlarges a shareholder’s duties or restricts its rights, also the consent of such shareholder to the change is required. (Sec. 141 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended.) The Agreement of Association may also be changed implicitly, if a decision has been made which de facto amends the wording of the Agreement of Association. Sec. 125 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 126 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 127 of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

3. Shareholders

Slovak Republic

193

In general, a shareholder shall not perform its voting right, if the shareholders’ meeting 193 is to decide directly over its rights. The most important examples for this are a decision of the shareholders’ meeting on non-monetary contributions of shareholders. The shareholder may further not perform its voting right in case the shareholders’ meeting decides on the exclusion of such shareholder and in case the shareholder is in delay with payment of its investment contribution.171 Managing director(s) shall convene the shareholders’ meeting at least once a year; law, 194 Agreement of Association or Articles of Association may set a shorter term. The meeting which is convened at least once a year is called Regular Shareholders’ Meeting and shall approve the ordinary financial statement which the managing director(s) shall submit to the Regular Shareholders’ Meeting together with a proposal for the distribution of profit and loss and, if required by a specific law,172 with the Annual Report. Also the shareholder, whose contribution amounts at least to 10 % of the registered 195 capital, may request the managing director(s) to convene the shareholders’ meeting. Should the managing director(s) not convene the shareholders’ meeting as required, the shareholders themselves are entitled convene the shareholders’ meeting.173 If not stated otherwise in the Agreement of Association, the shareholders’ meeting shall 196 be convened by a written invitation delivered to all shareholders, stating the date and program of the meeting. The invitation must be delivered in terms set by the Agreement of Association, otherwise at least 15 days prior to the meeting.174 dd) Shareholders’ Decisions without Shareholders’ Meeting

Shareholders of a limited liability company may also take decisions outside of the 197 shareholders’ meeting. In such case, the managing director or a shareholder, who is entitled to convene a shareholders’ meeting may submit a proposal for a resolution to all shareholders with a request to submit comments to it within a certain period of time. In case a shareholder does not respond accordingly within the set time limit, it is assumed that he disagrees with the proposal. The person, who submitted the proposal shall notify all shareholders of the final result of the voting.175 In case the company has only a sole shareholder, a shareholders’ meeting does not take 198 place. All decisions which fall within the competence of the shareholders’ meeting are taken by the sole shareholder instead.176

171 172 173 174 175 176

Sec. Sec. Sec. Sec. Sec. Sec.

127 (5) of the Act No. 513/1991 Coll., Commercial Code, as amended. 17 and following of the Act No. 431/2002 Coll., Accounting Act, as amended. 129 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 129 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 130 of the Act No. 513/1991 Coll., Commercial Code, as amended. 132 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended.

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199

Slovak Republic

b)

Shareholder’s Exclusion

III. Limited Liability Company

199 In case a shareholder is in default with the payment of its contribution into the registered capital, the company may, under threat of exclusion, request the shareholder to pay its due contribution in the given term which must not be shorter than three months. The shareholder who failed to pay its contribution in the term granted by the company can be excluded by a resolution of the Shareholders’ meeting. In such case, the business share of an excluded shareholder passes over to the company and can be transferred to other shareholder or a third person. The Shareholders’ meeting shall decide on such transfer. If the business share of an excluded shareholder is not transferred, the Shareholders’ meeting shall agree upon a registered capital decrease in an amount corresponding to the excluded shareholder’s contribution; this within six months after the shareholder’s exclusion. Otherwise the court will rule ex-offo on the cancellation of the company and order the company’s winding-up.177 200 Further, if stated in the Agreement of Association, the shareholders’ meeting may decide that the shareholders are obliged to pay a special contribution for the purpose of the company’s losses settlement, up to the amount of one half of the registered capital in proportion to the shareholders’ ownership interests. The same procedure applies to a shareholder who failed to pay the contribution for the purpose of the settlement of the company’s losses if the Shareholders’ meeting obliged him to do so. The interest in amount of 20 % of the unpaid contribution is payable too.178

4.

Shares

201 Shareholder’s business share represents its relevant rights, obligations and corresponding participation in the company. If not stated otherwise in the Agreement of Association, the amount of the business share is determined according to the proportion of the shareholder’s contribution to the registered capital of the company.179 Each shareholder may posses only one business share; if the shareholder subscribes another contribution, its business share will increase accordingly. On the other hand one business share may be owned by several persons; in such case the owners exercise their rights through a joint representative.180 202 A business share may be transferred to any other shareholder only with the prior consent of the shareholders’ meeting. If permitted by the Agreement of Association the business share may be transferred also to the third party. Such transfer may be also conditional upon the consent of the shareholders’ meeting.

177 178

179 180

762

Sec. 113 (3) through (6) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 121 (1), in connection with Sec. 113 (2) through (6) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 114 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 114 (2) and (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

4. Shares

Slovak Republic

203

The share purchase agreement has to be in writing and the signatures have to be 203 notarized. According to current judicial decisions, a business share can be transferred for or without consideration.181 The purchaser, if not already a shareholder, must explicitly declare that he accedes to the company’s Agreement of Association. The assignor is liable for the payment of the contribution by the purchaser. The transfer of a business share enters into effect against the company upon the delivery of the share purchase agreement to the company.182 After the cancellation of a legal entity being a shareholder, the business share passes 204 over to its legal successors, if the Agreement of Association permits so. The business share is heritable. The Agreement of Association may exclude this succession under the condition that the company has more than one shareholder. The heir can apply for the cancellation of his participation in the company by a judicial decision, if his further persistence in the company cannot be rightly required from him.183 The splitting of a business share is permitted only in case of its purchase or transfer to a 205 legal successor/heir. The Shareholders’ meeting is to approve the splitting of the business share. The Agreement of Association may exclude the possibility of the business share’s splitting.184 The business share may be a subject to a pledge. The pledge agreement must be in 206 writing and the signatures have to be notarized. The business share cannot be the subject of a pledge if the Agreement of Association excludes the possibility of business share’s transfer. If the business share’s transfer is permitted only with the consent of the shareholders’ meeting, the business share’s pledge is permitted under the same conditions. The pledge of the business share is effective as of the registration of the pledge with the Commercial Register, which can be applied by both of the pledgor or pledgee. During the term of the pledge the shareholder shall execute the shareholder’s rights connected with the participation in the company.185 If one shareholder acquires all business shares, it is obliged either to pay all monetary 207 contributions within three months from such acquisition or to transfer a part of its business share to another person. If it fails, the court can cancel the company and order its liquidation.186 The company cannot acquire its own business shares, if not stated otherwise by law. If a 208 company acquires its own business share, it cannot execute the shareholder’s rights connected thereto. Such business share must be treated as a business share of an ex-

181

182 183 184 185 186

Decision of the Supreme Court of the Slovak Republic, dated September 26, 2001 No. 6 Obo 96/2001. Sec. 115 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 116 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 117 of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 117a of the Act No. 513/1991 Coll., Commercial Code, as amended. Sec. 119 of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

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209

Slovak Republic

III. Limited Liability Company

cluded shareholder. Exceptions apply among controlling and controlled entities (members of a holding group).187

5.

Agreement of Association188

209 Agreement of Association as the basic company’s document must contain the following data: (a) name and seat of the company, (b) shareholders’ name and seat/address, (c) business scope of the company, (d) amount of the registered capital, amount of the contribution of each shareholder and amount of the contributions paid in as of the founding of the company and, if there are contributions in kind, also the object thereof and the amount being counted in on the contribution of the respective shareholder, (e) names, addresses and birth numbers (dates of birth) of the first managing directors of the company and the method of acting on behalf of the company, (f) names, addresses and birth numbers (dates of birth) of the first members of the supervisory board of the company, if being constituted, (g) identification of the contributions administrator, (h) amount of the reserve fund, if being created at the time of founding of the company and the amount to which the reserve fund has to be filled up and the method to the filling up, (i) benefits granted to the founders or to persons who contributed to the acquisition of the right to conduct business, (j) assumed costs of the founding and establishment of the company, (k) other data if required by law. The Agreement of Association can state, that the company shall issue the Articles of Association including the internal organizational structure of the company and details on some matters ruled by the Agreement of Association.

6.

Managing Director(s)189

210 One or more managing directors constitute the statutory body of a limited liability company. If not stated otherwise in the Agreement of Association, each managing director is entitled to act on behalf of the company individually (method of acting).190 The Agreement of Association can alter the method of acting so that only certain number (two, all) of managing directors can act on behalf of the company. 211 The right of the managing director(s) to act on behalf of the company can be limited by the Agreement of Association or by shareholders’ meeting.191 Such restriction is not effective against third parties; it is only effective in the relationship between the company and the managing director. Therefore, if the Agreement of Association limits the entitlement to act on behalf of the company with a certain maximum amount or if certain matters are excluded (e.g. buying and selling of land, encumbering the company’s property with easements etc.), such limits are not effective against third parties. 187 188 189 190 191

764

Sec. Sec. Sec. Sec. Sec.

120 of the Act No. 513/1991 Coll., Commercial Code, as amended. 110, 141 of the Act No. 513/1991 Coll., Commercial Code, as amended. 133 through 135a of the Act No. 513/1991 Coll., Commercial Code, as amended. 133 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 133 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

6. Managing Director(s)

Slovak Republic

212

It is not allowed to condition the validity of the managing director’ action with the acting together with the company’s proxy (prokurista). Only a natural person can be a managing director.192 The managing directors are 212 appointed by the shareholders’ meeting; either a shareholder or a third person can be appointed as a managing director.193 Managing director(s) as the company’s statutory body decide on the commercial man- 213 agement of the company. Such decisions are adopted if approved by the majority of managing directors. Managing director(s) are obliged to secure the properly execution of accounting and other records as required by law, maintain the shareholders’ list and inform the shareholders of the company’s matters. They submit the ordinary and extraordinary financial statements and the proposal for the distribution of the benefit and loss to the shareholders’ meeting. Managing director(s) shall perform their function with professional care and in accor- 214 dance with the interests of the company and all its shareholders. Managing directors who fail to perform the duties of their function are liable jointly and severally for the damage caused to the company. A managing director is not liable for the damage he caused if he can prove that he acted with professional care and bona fide or if he executed the resolution of the shareholders’ meeting except if the resolution of the shareholders’ meeting contravenes the law, the Agreement of Association or Articles of Association. The liability of the managing director can neither be excluded nor limited.194 If not stated otherwise in the Agreement of Association or Articles of Association, the 215 managing director must not on his own behalf or at his own expense conclude agreements cohering with the company’s business activity, intercede to others the company’s business, be a shareholder with unlimited liability in another company or be a statutory body or a member thereof in another company with similar scope of business (noncompetition clause). In case of breach of the non-competition clause, the company can claim the release of the profits or the transfer of rights arising from the respective competitive activity. The right for damages remains hereby unaffected. The company’s right has to be asserted within three months after the company has taken notice of such infringing action, or within one year at the latest, otherwise the right for damages expires.195 In some cases the right of the managing director(s) to act in the company’s name is 216 restricted. If a company was dissolved and is being winded up and the winding up is not executed by the managing directors or if the company is bankrupt or if the compulsory

192 193 194 195

Sec. Sec. Sec. Sec.

133 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 133 (4) of the Act No. 513/1991 Coll., Commercial Code, as amended. 135a of the Act No. 513/1991 Coll., Commercial Code, as amended. 136 of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

765

217

Slovak Republic

III. Limited Liability Company

administrator has been designated, the managing director(s) can only execute the activities not passed over to the liquidator (likvidtor), bankruptcy administrator (sprvca konkurznej podstaty) or compulsory administrator.196

7.

Supervisory Board

217 The supervisory board is not a mandatory body of a company, it is established only in case it is expressly stipulated by the Agreement of Association. It supervises the managing directors’ activities, controls the financial and accounting records, reviews the financial statements and the proposal for the distribution of profit and loss and informs the shareholders’ meeting of its findings at least once a year.197 218 The shareholders’ meeting elects the members of the supervisory board; if established, it must have at least three members. In addition, a member of the supervisory board may not simultaneously perform the function of a managing director of the company. The members of the supervisory board must comply with the same conditions as the managing directors.198 219 The members of the supervisory board participate in the shareholders’ meeting and address the shareholders upon a request. The supervisory board can convene the shareholders’ meeting whenever it is necessary in the company’s interests. For convening the shareholders’ meeting the general rules apply.199

8.

Accounting

220 All companies registered with the Commercial Register, have to keep the double entry bookkeeping. The bookkeeping is ruled by the Act No. 431/2002 Coll., Accounting Act. All entrepreneurs (legal entities, foreign entities, natural persons – entrepreneurs and/or all individually earning natural persons) have to issue a yearly financial statement.200 An auditor is to certify financial statements of all limited liability companies that fulfill two of the following three conditions: (i) the company’s assets exceeded the amount of SKK 20 million and/or (ii) its net turnover exceeded SKK 40 million and/or (iii) average number of employees in one accounting period exceeded 20.201 The certified financial statement is to be included in an Annual Report.202

196 197 198 199 200 201 202

766

Sec. Sec. Sec. Sec. Sec. Sec. Sec.

68 (5) of the Act No. 513/1991 Coll., Commercial Code, as amended. 137 through 138 of the Act No. 513/1991 Coll., Commercial Code, as amended. 139 of the Act No. 513/1991 Coll., Commercial Code, as amended. 140 of the Act No. 513/1991 Coll., Commercial Code, as amended. 17 and following of the Act No. 431/2002 Coll., Accounting Act, as amended. 19 (1) of the Act No. 431/2002 Coll., Accounting Act, as amended. 20 of the Act No. 431/2002 Coll., Accounting Act, as amended. Slavomr Cˇauder

9. Taxation

Slovak Republic

221

The yearly individual ordinary, extraordinary, consolidated and continuous financial 221 statement and the Annual Report, if applicable, have to be filed with the Documents Collection of the Commercial Register.203

9.

Taxation

In Slovakia, the new Act No. 595/2003 Coll., Income Tax Act, as amended, introduced 222 a flat rate in the amount of 19%. The income tax of all persons and legal entities amounts to 19%, independently from the amount of their incomes or turnover. Also the value added tax amounts to 19% according to Act No. 289/1995 Coll., Value Added Tax Act, as amended. Other taxes such as consumption tax, real estate tax, real estate transfer tax and others may be applicable.

10. Termination of the Business a)

Dissolution of the Company

The precise moment when a company ceases to exist is its deletion from the Commer- 223 cial Register.204 Before this, the company must be dissoluted either with or without liquidation. The dissolution of the company without liquidation is possible only in case the rights and obligations of the company pass to another entity. The company’s winding up is also not required if the company has no property, if the application for declaration of bankruptcy has been refused for the lack of company’s property, if the bankruptcy proceedings have been cancelled because the company’s property is not sufficient for the costs and remuneration of the bankruptcy administrator or if there is no property left after the end of bankruptcy proceedings. 205 The company is automatically dissolved by the expiration of the time for which it was 224 established or by the achievement of the purpose for which it was founded. The dissolution may only be decided by the shareholders. Further the company may be dissolved by the decision of a government authority, i.e. on the day stated in the respective court decision or by the termination of the bankruptcy proceedings or by the rejection of a bankruptcy petition due to a lack of assets.206 The court shall upon a proposal of a government authority or a proposal of a legally 225 entitled person or ex-offo, decide on the dissolution of a company under the following conditions: – the Shareholders’ meeting did not take place in the respective calendar year or the company’s bodies have not been established for longer than three months; – the company loses the license to conduct business; 203 204 205 206

Sec. Sec. Sec. Sec.

1 g) of the of the Act No. 530/2003 Coll., Commercial Register Act, as amended. 68 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 68 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 68 (3) of the Act No. 513/1991 Coll., Commercial Code, as amended.

Slavomr Cˇauder

767

226

Slovak Republic

III. Limited Liability Company

– the conditions set by law for the establishing of a company are not fulfilled; – the company fails to create or supplement the obligatory reserve fund as set by law; – the company fails to comply with the Sec. 56 (3) of the Commercial Code; – the company failed to file the individual financial statement with the Documents Collection for two accounting periods at least.207 226 Before the dissolution of a company by judicial decision as described above, the court shall grant to the company a time limit in which the insufficiency being the reason for the proposed dissolution can be removed. Before the dissolution of a company the court shall also research whether the company does or does not posses sufficient assets to cover the costs and remuneration of the bankruptcy administrator. In the first case the court decides on the dissolution of the company and its winding up, in the latter case the court decides on the dissolution without a winding up. After the decision on the dissolution of a company without winding up comes into legal force, the court deletes the company from the Commercial Register. 208 b)

Liquidation of the Company

227 The company enters into the liquidation phase as of the day of its dissolution. Such fact must be registered in the Commercial Register and the company has to use the attachment “in liquidation” in connection with its business name. 209 228 As soon as the company enters into liquidation a liquidator must be appointed by the shareholders’ meeting. In case the dissolution of the company was imposed by a court, the liquidator is appointed by such court. Once appointed, the liquidator assumes the competence (including responsibilities) of the statutory body to act on behalf of the company. 210 Until the liquidator is appointed, the managing director(s) have to exercise its function.211 After the liquidator has taken all necessary steps he issues a liquidation report and makes a proposal for the allocation of the liquidation balance among the shareholders. 229 In most cases the consent of the Tax Authority must be attached to the application for the deletion from the Commercial Register.212

207 208 209 210 211 212

768

Sec. Sec. Sec. Sec. Sec. Sec.

68 (6) of the Act No. 513/1991 Coll., Commercial Code, as amended. 68 (7) through (9) of the Act No. 513/1991 Coll., Commercial Code, as amended. 70 (2) of the Act No. 513/1991 Coll., Commercial Code, as amended. 71 (1) of the Act No. 513/1991 Coll., Commercial Code, as amended. 68 (5) of the Act No. 513/1991 Coll., Commercial Code, as amended. 68 (10) of the Act No. 513/1991 Coll., Commercial Code, as amended. Slavomr Cˇauder

1. Commercial Partnership

Slovak Republic

230

IV. Other corporate forms in the Slovak Republic In addition to the corporate forms mentioned above, i.e. the joint stock company and the limited liability company, the Slovak Republic also recognizes two other types of companies – the commercial partnership and the limited partnership. Both of these corporate forms are based on the personal ground, which means the personality of their founders and shareholders is inseparably bounded to the life of the company.

1.

Commercial Partnership

The commercial partnership is a company in which at least two persons conduct busi- 230 ness under a joint business name and guarantee the obligations of the company jointly and severally with all their personal assets. 213 The shareholder of such a company may be both a person or a legal entity. Rights and 231 obligations of the partners are stipulated in the partnership agreement. Unless stated otherwise herein, all partners must adopt all major decisions concerning the company. Business management of the company belongs to each of the partners in accordance 232 with the rules agreed by the partners. When managing the company, the partners are obliged to act with the care of a proper businessman. Any profit is allocated between the partners in equal proportions as well as any loss, if not agreed otherwise. The statutory body of the company, i.e. the body entitled to act on behalf of the 233 company vis--vis third parties, are all partners. Each of them is entitled to act on behalf of the company independently. The partners can also authorize one of them to act on behalf of the company in some cases or in full extent, then, the remaining partners loose their power to act on behalf of the company in such extent.

2.

Limited partnership

The limited partnership is a combined form of a commercial partnership and a limited 234 liability company. It is typical for such a company that one or more partners guarantee the obligations of the company by all its personal assets (so-called general partners214) and one or more of the partners guarantee the obligations of the company up to the amount of their non-paid investment contribution as registered in the Commercial Register (so-called limited partners215). The management of the limited partnership is the responsibility of the general partners. 235 Other issues concerning the company are decided both by the general and limited 213 214 215

Sec. 76 of the Act No. 513/1991 Coll., Commercial Code, as amended. In Slovak: ‘‘komplementa´r’’. Slovak ‘‘komanditista’’.

Slavomr Cˇauder

769

236

Slovak Republic

V. Branch office of foreign entity in the Slovak Republic

partners by the majority of votes, unless stipulated otherwise in the partnership agreement. The basic obligation of the limited partners is to make the investment contributions to the company. The amount of such investment contributions is at least SKK 10,000. The limited partners on the other hand have the right to inspect the accounting documents of the company and control the data included therein. 236 Profit is allocated into two parts, one belonging to the general partners and one to the company. The part allocated to the company is distributed among limited partners after the taxation in the proportion stated in the partnership agreement, otherwise in two equal parts. 237 The statutory body of the company are the general partners; each of them is entitled to act on behalf of the company independently, if not stated otherwise in the partnership agreement.

V.

Branch office of foreign entity in the Slovak Republic

In general a foreign entity may conduct business on the territory of the Slovak Republic under the same conditions and to the same extent as Slovak entities unless the applicable law expressly states otherwise. The respective provisions of the Slovak Commercial Code216 consider a foreign entity to be a person with its seat outside the Slovak Republic. Such foreign entity may operate its business through its enterprise or branch office located in Slovakia. In any case the branch office and the scope of business activities is subject to registration in the Commercial Register. To avoid any difficulties and to ensure the smooth operation of the branch office, Slovak law requires that each branch office is represented by a head of such branch office,217 a responsible person entitled to act on behalf of the foreign entity. A branch office is established upon decision of the respective foreign entity. The other steps are similar to those pertaining to other corporate forms, i.e. the branch office has to acquire all necessary permissions for conducting its business in the Slovak Republic, it has to have sufficient legal title to the premises of its seat etc. After all these conditions are fulfilled the registration into the Commercial Register follows. The procedure of closure of a branch office is again very similar to other corporate forms and starts by the decision of the company on termination of the branch office and is consequently terminated by its deletion from the Commercial Register. 216 217

770

Sec. 21 of the Act 513/1991 coll., Commercial Code, as amended. Slovak ‘‘vedu´ci organizacˇnej zlozˇky’’.

Slavomr Cˇauder

Spain Israel Garca Rico

Table of Contents Introduction: Main Features of Spanish S. A. and S. L.

774

II. Organization and legal Personality

775

I.

1. a)

b) c)

2. a) b) 3. a)

b)

4. a) b) 5. a)

Act of incorporation or organization and entry at the registry Execution of the Public Deed of Incorporation or Organization before a Notary Public Transfer Tax and Stamp Duty Filing of the Public Deed of Incorporation or Organization at the responsible Commercial Registry Limitation of liability and legal personality Restriction of liability for corporate debts Independent assets and liabilities The capital of the company The S. A. aa) Minimum capital. Subscription bb) Shares The S. L. aa) Minimum capital bb) Membership units Contributions Contributions in cash Contributions in kind Restrictions to the transfer of shares and membership units The S. A. (articles 51 to 65 of the LSA) aa) Free transfer principle bb) Limitations to free transfer

Israel Garca Rico

775

775 776

776 777 777 777 778 778 778 778 779 779 779 779 779 779 779 780 780 780

b) The S. L. (articles 26 to 34 of the LSRL) aa) Closed company principle bb) Limitations to transfer prohibition. cc) Legal procedure for the transfer of membership units dd) Purchase value

III. Bodies of Governance 1. The General Meeting a) Authorities and restrictions of the General Meeting b) Call for General Meetings aa) Persons to call bb) Call procedure cc) Call publishing c) Assembly of the General Meeting and system of majorities aa) Assembly and ballots. Ordinary resolutions bb) Assembly and ballots. Qualified resolutions cc) Unanimity prohibition dd) S. L. specialties 2. The Board of Directors a) Call for Board meetings aa) Persons to call bb) Call procedure cc) Universal meetings b) Quorum c) Adoption of resolutions

IV. Liability of the Directors 1. Legal system a) Grounds

782 782 782 782 783 783 783 783 784 784 784 784 785 785 785 786 786 786 786 786 786 786 787 787 787 787 787

771

Spain b) Company action c) Individual shareholder or third party action for corporate interests d) Individual shareholder or third party action for their own interests 2. Features of liability a) Events of liability b) Negligence c) Joint and several liability

Table of Contents 787 788 788 788 788 788 789

V. Amendments to the Articles of

Association 1. a) b) c) d)

e)

2. a) b) c)

Amendment to the Articles of Association of the S. A. Ordinary requirements Specific requirements Formalities Increase of capital aa) Capital increase procedure bb) Contributions Reduction of capital aa) Reduction purposes bb) Reduction procedure cc) Specific cases Amendment to the Articles of Association in the S. L. Formalities and requirements Increase of capital. Differences with regards to S. A. legal system Reduction of capital

VI. Conversion, Merger and Spin Off 1. Conversion a) Conversion Principles aa) Continuity bb) Legal status of the company members cc) Corporate liability b) Conversion procedure aa) Resolution to convert the company bb) Publicizing cc) Public deed of re-registration dd) Re-registration

772

789 790 790 790 791 791 791 792 793 793 793 794 794 794 795 795 796 796 796 797 797 797 797 798 798 798 799

2. Merger a) Principles aa) Definition bb) Universal succession cc) Consideration b) Merger procedure. Stages of the merger aa) Merger Project bb) Reports on the merger project cc) Merger balance sheet dd) Merger balance sheet auditing ee) Merger resolutions (1) Call for the Meeting. Availability of documents (2) Qualified majorities ff) Publishing of the merger gg) Creditors’ opposition hh) Execution of the public deed ii) Tax formalities jj) Merger registration kk) Reports to Public Treasury for submission to tax neutrality regime 3. Spin off a) Principles aa) Definition. Spin off types bb) Spin off principles equivalent to those of the merger cc) Universal succession dd) Economic unit ee) Consideration b) Spin off procedure. Stages of the spin off: aa) Spin off project bb) Reports on the spin off project cc) Spin-off balance sheet dd) Approval of the spin-off project ee) Execution in a public instrument ff) Creditors’ opposition

VII. Dissolution and Liquidation 1. 2. 3. 4. 5. 6.

Starting of liquidation period Dissolution resolution Liquidation period. Liquidating body End of liquidation period Final liquidation balance sheet Liquidation public deed and registration

799 799 799 799 799 800 800 801 801 801 801 802 802 802 803 803 803 803 804 804 804 804 804 804 804 805 805 805 805 806 806 806 806 806 806 807 807 807 808 808

Israel Garca Rico

Index

Spain

Index actual/reasonable value 28, 37, 44, 79, 82, 117 amendment(s) 50, 56, 77, 78, 79, 80, 81, 88, 89, 90, 98, 120, 122, 127 ancillary services 36, 42, 79 announcement(s) 80, 86, 89, 93, 100, 124, 125, 126 articles of association 2, 3, 9, 21, 23, 30 to 39, 41, 42, 43, 48, 49, 50, 56, 57, 60, 64, 67, 68, 72, 77 to 81, 85, 88, 93, 120, 122, 127, 150 auditor(s) 82, 84, 93, 117, 118, 120 balance sheet(s) 84, 87, 93, 106, 112, 117, 118, 120, 124, 127, 145, 151, 153 to 156 ballot 57, 86 bearer form 23 Board of Directors 35, 49, 51, 62, 63, 65, 66, 67 bodies of governance 9, 45, 49, 150 call 51 to 54, 56, 58, 63, 64, 66, 70, 78, 84, 89, 91, 120, 122 capitalist 5, 18, 68 Central Commercial Registry 9 Certificate(s) 9, 23, 27, 34, 84, 104, 107 Chairman 52, 63 civil liability 68 Commercial Registry 8, 9, 13, 14, 32, 37, 53, 79, 80, 82, 86, 87, 90, 93, 99, 100, 103, 104, 106, 114, 115, 124, 127, 130, 131, 142, 147, 151, 156, 157 companies in an irregular situation 14 companies under formation 14 Consolidation 109 contribution(s) 1, 9, 14, 21, 22, 26, 27, 28, 84, 85, 91, 93, 98, 111, 142 Conversion 94 to 106, 113, 117 conversion rate 111, 113, 116, 139, 143 damage(s) 36, 68, 71, 75, 76, 79, 97 debt(s) 12, 15, 16, 17, 19, 70, 84, 86, 91, 93, 98, 125, 137 detrimental act(s) 68, 69, 71, 76 Diligence 72, 74, 75 director(s) 9, 14, 21, 28, 36, 46, 50, 51, 52, 61, 64, 68 to 76, 78, 82, 84, 91, 92, 93, 113, 114, 115, 120, 121, 135, 141, 142, 150

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Dissolution 96, 109, 122, 149 to 157 Distribution 87, 95, 141, 154, 155 Duties 68, 72, 74, 150, 152 economic unit 137 Executive Committee 9, 49, 52 family-managed 4 founder shareholders/members 9, 14, 20, 28, 31 General Meeting 9, 35, 40, 46 to 56, 58, 68, 69, 70, 78, 79, 84, 86, 87, 89, 91, 93, 101, 112, 114, 117, 119, 120, 121, 122, 124, 126, 150, 151, 154 increase of capital 27, 28, 84, 86, 87, 93, 122, 127, 129 independent expert(s) 9, 28, 115, 116, 120, 135 intuitu personae 2 jointly and severally liable 14, 28, 68, 98, 138, 148 judicial call(s) 51 legal personality 7, 14, 18, 19, 96 liability 1, 15, 18, 31, 36, 68, 69, 70, 72, 74, 76, 93, 98, 135, 148 liquidation 51, 150 to 157 loss(es) 85, 87, 93, 150 majority 47, 48, 54, 55, 56, 59, 67, 69, 79, 86, 87, 101, 102, 123, 154 Managing Director 52 mandatory reserve 84, 87 membership units 2, 9, 16, 24, 25, 29, 30, 31, 38, 39, 40, 42, 43, 44, 59, 60, 61, 91, 92, 102, 111, 113, 116, 127, 139, 140, 141 Members Register 25, 92 merger 56, 61, 109, 110, 112, 114, 116, 117, 118, 119, 120, 124 to 132, 134, 141, 143 to 148, 150 merger project 113, 114, 115, 117, 119, 120, 121, 122 minimum capital 21, 24 “natural environment” 31 Negligence 73, 76 net worth 85, 86, 87, 93, 104, 111, 133, 136, 137 Official Gazette 53, 79, 80, 82, 86, 87, 93, 103, 104, 114, 124, 130, 147, 156 “orderly entrepreneur” 75 preemptive acquisition rights 31, 35, 41, 42

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I. Introduction: Main Features of Spanish S. A. and S. L.

preemptive subscription right 35, 40, 82 Proxy 54, 55, 66, 67 public deed 8, 9, 12, 13, 14, 27, 28, 80, 91, 92, 93, 100, 104, 105, 106, 107, 126, 127, 129, 130, 151, 154, 157 qualified majority 54, 55, 56, 79, 86, 87, 101 quorum(s) 56, 57, 78, 123 reduction of capital 43, 56, 81, 85, 87, 91, 93 registered office 9, 13, 53, 78, 79, 80, 86, 87, 89, 91, 93, 103, 113, 114, 120, 122, 124, 156 registered stock 23, 33, 82 report(s) 9, 78, 82, 84, 91, 93, 115, 116, 118, 120, 121, 131, 135, 142, 143, 144, 155 re-registration 98, 99, 100, 106, 108 restricting clause(s) 34, 35 restriction of liability 15 right of opposition 86, 124, 125, 148 right of separation/right to separate 31, 36, 39, 79, 102, 106

I.

rights in rem 23 risk 17, 35 security(ies) 17, 23, 33, 84, 87 set off 84, 87, 91, 93 shares 3, 5, 9, 16, 17, 21, 22, 23, 29 to 37, 79, 82 to 87, 104, 110, 111, 113, 115, 116, 120, 122, 127, 139, 140, 141 simple majority 55, 69 spin off 56, 61, 132, 133, 134, 135, 137, 138, 141, 144, 148, 150 spin-off project 138, 139, 141, 142, 143 Stock Register 23, 104 third parties 31, 35, 38, 71, 93, 94 tax neutrality regime 128 Transfer Tax and Stamp Duty 10, 13 unanimity 57 uncalled capital 21, 84

Introduction: Main Features of Spanish S. A. and S. L.

1 This report explains briefly and systematically the basic features of the two most relevant forms of company in Spanish Corporate Law. The “S. A.” (“Sociedad Annima” – similar to the U. S. Corporation) and the “S. L.” (“Sociedad Limitada” – similar to the U. S. Limited Liability Company). In both corporate structures, the liability of their owners is limited to their contributions to capital, but they differ as regards the extent to which they permit new owners to enter their capital and the degree of freedom of decision-making that each allows. 2 One of the characteristic features of the S. L. is its closed nature (intuitu personae). This is seen, in turn, in many aspects to be analyzed under this heading. One aspect of particular relevance is the procedure for the transfer of membership units (“participaciones”): as described below, transfers, with the exception of those made to members, their spouses, forebears or descendants, or to companies in the same Group, are subject to a series of restrictions, unless otherwise provided for in the Articles of Association. 3 On the other hand, the S. A. is an open company by definition and its shares may therefore in principle be freely transferred. Any restriction to the transfer of shares has to be specifically established in the Articles of Association, on the initiative of the shareholders. However, such restrictions should never make it impossible to transfer the shares in practice. 4 The second feature that differentiates the S. L. from the S. A. is the level of discretional decision allowed in the S. L. Under the Act governing the S. L. (“Ley de Sociedades de 774

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Responsabilidad Limitada” or “L. S. R. L.”), members of the S. L. are frequently able to impose their will over the provisions of the Act (which is therefore merely dispositive, in contrast with the mandatory and compulsory nature of the Act governing the S. A., the “Ley de Sociedades Annimas” or “L. S. A.”), to adapt their company to the needs of the business or undertaking in question according to its corporate and economic situation without being confined to the predetermined structure that would arise from a stringent application of the law. This makes the S. L. the most suitable formula for small-sized or family-managed undertakings, which need more flexible action and performance mechanisms than those allowed by the rigid systems provided for by law, to be able to adapt to the particular scenario envisaged. In contrast with the foregoing, the S. A. provides the framework for the large capitalist 5 company, where personal factors play only a secondary role and the element of financing or economic support takes the lead, and in which the management of the business is vested in a group of trusted professionals. The S. A. is defined precisely by its submission to a larger set of mandatory provisions seeking to protect the minority shareholder and to defend the economic interests of the company’s investors and creditors.

II. Organization and legal Personality The S. A. and the S. L. coincide in all aspects as regards their organization and legal 6 personality and this matter may therefore be discussed for both of them under the same heading.

1.

Act of incorporation or organization and entry at the registry

To acquire their legal personality, which permits them to trade with their own assets, 7 and which will be separate and independent from the personalities of their shareholders or members, both corporate structures must meet the following requirements: a)

Execution of the Public Deed of Incorporation or Organization before a Notary Public

The public deed of incorporation or organization of the company should contain the 8 minimum statements established both in the “Ley de Sociedades Annimas” (“LSA” – Act governing the S. A.) and in the “Ley de Sociedades de Responsabilidad Limitada” (“LSRL” – Act governing the S. L.) and in the Commercial Registry Regulations. From among the various aspects that should necessarily be mentioned in the public deed 9 of incorporation or organization, the following should be pointed out: – Identification of the founder shareholders /members. – Articles of Association governing the corporate affairs of the Company, including information such as its corporate name and registered office, corporate purpose, capital, number and classes of shares /membership units into which the capital is divided, voting and economic rights conferred by each share or unit, Israel Garca Rico

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II. Organization and legal Personality

procedure for the transfer of shares and membership units, bodies of governance (General Meeting, body of directors, executive committees, if any), etc. – Certificate evidencing that the Company has reserved the corporate name it intends to use. This certificate is issued by the Central Commercial Registry. – Bank certificates recording the contributions in cash. Alternatively, the S.A. and the S.L. could also be incorporated by means of contributions in kind made by the shareholders /members to the capital of the company. The incorporation of an S. A. through contributions in kind requires a report to be issued by an independent expert appointed by the Commercial Registry, certifying that the value of the contribution is consistent with the number of subscribed shares in question plus their share premium. Such requirement is not referred to the S.L., although in this last case members are liable for the reality and value of the goods contributed. b)

Transfer Tax and Stamp Duty

10 The organization of companies is liable for Transfer Tax and Stamp Duty (for Corporate Transactions). The Company itself is the obligor and is therefore responsible for settlement of the tax. 11 For both the S. A. and the S. L., the tax rate is 1% of the taxable base, equal to the subscribed capital of the Company, plus the eventual share premium. 12 The Company has 30 business days as from the execution of the public deed of incorporation or organization to settle the tax. This tax is subject to self-settlement, in other words, it is the obligor itself that calculates and pays the tax debt to the Tax Authorities. c)

Filing of the Public Deed of Incorporation or Organization at the responsible Commercial Registry

13 After the Public Deed of Incorporation or Organization has been executed and Transfer Tax and Stamp Duty has been paid, the company should be entered at the Commercial Registry of the province where the Company has its registered office. 14 The Company is incorporated or formed when it is entered, in other words, it acquires legal personality only upon its entry at the responsible Commercial Registry (articles 7 of the LSA and 11 of the LSRL). This is in line with the complex matter of companies in an irregular situation (“sociedad irregular”) and companies under formation (“sociedad en formacin”), governed in detail by the LSA (article 11.3 of the LSRL refers to the LSA as regards this matter): – A company under formation is defined as the company for which the public deed of incorporation or organization has been executed but has not yet been filed at the Commercial Registry. In this regard, article 15 of the LSA establishes that those persons who perform acts and/or make agreements on behalf of the company before it has been entered at the Commercial Registry will be jointly and severally liable with their own assets for such acts and/or agreements, unless their ef776

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fectiveness was made conditional upon the entry of the company or the company, after its entry and once it has acquired legal personality, assumes the rights and obligations for such acts and agreements. By way of exception to the foregoing, a company under formation will be liable only with the assets comprised on the contributions made by its shareholders or members for those acts and agreements that are essential for the company to be filed for entry, for those performed by the directors in the exercise of the authorities conferred upon them in the public deed of incorporation or organization for the stage prior to entry and for those stipulated under a specific power by the persons appointed for the purpose by all the shareholders or members. – A company is in an irregular situation when its public deed of incorporation or organization has been executed, but either there is no record that any initiative has been taken to register the deed, or entry of the deed has not been requested within the term of one year after its execution. In such events, article 16 of the LSA establishes that (i) any shareholder may request that the company be dissolved and that his contributions to capital be refunded, (ii) the founder shareholders or members are unlimitedly and jointly and severally liable with their assets, as occurs in partnerships, for the transactions performed by the company.

2.

Limitation of liability and legal personality

a)

Restriction of liability for corporate debts

The basic feature common to both the S. A. and the S. L. is the restriction of liability 15 for corporate debts. This liability is limited to the Company’s assets and does not extend to the personal assets of its shareholders or members. This means that the shareholder or member is under the obligation to contribute a 16 certain amount for the shares or membership units subscribed for or assumed, and is liable to the company for such obligation. However, the shareholders or members will not be liable with their own assets for the debts acquired by the company while conducting its business. The company’s creditors may therefore take action only against the corporate assets and 17 not against the personal assets of the shareholders or members holding an interest in its capital, despite the fact that the company may be incapable of fully honoring its debts with such creditors. Part of the business risk is therefore transferred to the company’s creditors, even though these may attempt to defend themselves through different formulas to obtain security (requirement of bank guaranties, ancillary pledge agreements over the shares in the company when it applies for certain loans, etc.). b)

Independent assets and liabilities

Limited liability, a key feature of capitalist companies, cannot be dissociated from the 18 independence of the company from the point of view of its capital, since the company’s legal personality is independent from that of its shareholders or members. Israel Garca Rico

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II. Organization and legal Personality

19 Rights and obligations (including corporate debts or liabilities) are attributed to the company precisely because it has its own independent assets and liabilities; this is a concept that could not be envisaged by law unless the company had its own legal personality.

3.

The capital of the company

20 In view of the foregoing, the capital of the company and the manner in which it is contributed by the founder shareholders and members is of vital importance. The LSA and the LSRL define these aspects as set forth below: a)

The S. A.

aa)

Minimum capital. Subscription

21 The minimum capital to incorporate an S. A., in general terms and if the company is not subject to specific legislation, is J 60,101.21. The capital stock should be fully subscribed for and at least 25% of the par value of each share should be paid. The outstanding amount on each share, namely uncalled capital, should be called and paid within the term established in the articles of association or, in the absence of a provision, by a resolution or decision of the directors (article 42 of the SA Act). Cases in which calls on capital are to be paid through contributions in kind are an exception to the foregoing, since such contributions should be made within five years. 22 Additionally, the existence of outstanding calls on capital hinders the performance of capital increases since, pursuant to article 154 of the LSA, capital increases through further contributions in cash may not be made until previously-issued shares have been fully paid up. However, capital may be increased if outstanding calls on capital do not exceed 3% of the capital stock. bb) Shares

23 The capital stock is divided into shares, which may be represented by certificates, which in turn may be in bearer form or registered, or by book entry. Shares always constitute securities or stock. – If the shares are registered stock, the articles of association may establish restrictions to their transfer, which may be performed by endorsement of the share certificates or under a purchase and sale agreement. In such cases, the Company is also obliged to keep a Stock Register, where successive transfers and the creation of rights in rem and other encumbrances over the shares will be entered. It is important to note that the company will only acknowledge the status of shareholder to those persons entered as such on the Stock Register (article 55 LSA). – On the other hand, shares in bearer form, by nature, do not admit any restriction to their transfer, which is always subject to the procedure established in article 545 of the Commercial Code (mere delivery of possession of the document in bearer form).

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b)

The S. L.

aa)

Minimum capital

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The S. L. should have a minimum capital of J 3,005.06, which will be divided into 24 membership units (“participaciones sociales”) fully paid up at the organization of the company. The LSL does not permit outstanding calls on capital in these companies, so that the capital has to be fully assumed and paid up as from the company’s formation. bb) Membership units

The membership units should be entered on the Members Register of the Company. 25

4.

Contributions

The capital of both the S. A. and the S. L. may be paid through contributions in cash or 26 in kind. a)

Contributions in cash

If the capital is paid through contributions in cash, payment should be evidenced to the 27 Notary Public executing the public deed of organization, by submitting a certificate recording that the relevant amount has been deposited with a bank. The certificate should be dated no earlier than two months before the date of the public deed of organization or increase of capital. b)

Contributions in kind

Unlike the case of contributions in cash, the system for contributions in kind applicable 28 to the S.A, differs materially from that of the S. L. Contributions in kind to the capital of an S. A. must be appraised by an independent expert. This requirement does not apply to the S. L. Article 21 of the LSRL establishes that the founder members and those who acquire a membership interest paid by contributions in kind will be jointly and severally liable to the company and to the company’s creditors for the reality of the contribution and for the value attributed to it in the public deed. The directors will also be jointly and severally liable for the difference between the actual value of the contribution and the value attributed to it in the public deed executing the increase of capital.

5.

Restrictions to the transfer of shares and membership units

There are notable differences between the systems governing the transfer of shares and 29 of membership units because the principles underlying the LSA are different from those that inspire the LSRL. This means that, although the practical results may be very similar as regards the 30 admission of certain clauses restricting the transfer of shares or membership units, such Israel Garca Rico

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II. Organization and legal Personality

clauses respond to different principles, depending on whether they are established in the articles of association of an S. A. or of an S. L. 31 This report does not contain an exhaustive analysis of each and every one of the differences between the two legal systems and examines instead the features that define each one of them considering the following aspects: a) The principles inspiring the S. A. and the S. L.: The S. A. is, in principle, an open company by definition, in other words, its purpose lies in the recruitment of capital from any person who voluntarily contributes it to the company to enable the latter to achieve its aims, without considering the personal circumstances of such person. On the other hand, the limited liability company is a closed company in which the importance of the members’ personal circumstances is enhanced; the limited liability company has to be protected from the entry of third parties who have nothing in common with its initial founders or objectives. b) The starting point of their respective legislation: Precisely because of their different principles, the legislation applicable to the S. A. stems from the free transfer of the shares in the company (article 63 of the LSA), while, pursuant to article 29 of the LSRL, only certain transfers (inter alia, those performed to the spouse, forebears or descendants of the transferor, or companies in the same group: namely, the “natural environment” of the member) are absolutely free and the remaining events are subject to a system of preemptive acquisition rights held by the members. c) Limits to the restrictions that may be imposed by the articles of association on the transfer of the shares: Clauses in the articles of association of an S. A. making it practically impossible to transfer the shares, or prohibiting their transfer for more than two years, are prohibited (article 63 of the LSA); however, the transfer of membership units by an S. L. may be absolutely restricted, provided that its articles of association recognize the right of its members to separate from the company at any time (article 30.3 LSRL). Absolute prohibition of the voluntary transfer of membership units without the right to separate from the S. L. is also permitted, for a maximum term of five years as from the company’s formation. a)

The S. A. (articles 51 to 65 of the LSA)

aa)

Free transfer principle

32 Articles 63 of the LSA and 123 of the Commercial Registry Regulations define the S. A. essentially as an open company so that, in the absence of an express provision in the articles of association, its shares may be freely transferred. Clauses in the articles of association making it practically impossible to transfer the shares are therefore prohibited. bb) Limitations to free transfer

33 However, the principle of free transfer of the shares may be limited in the articles of association or under individual agreements between shareholders, which should voluntarily undertake to observe certain restrictions to their trade in such cases. The articles of association can only establish restrictions to the free transfer of shares where these are registered stock: the transfer of shares in listed companies cannot be restricted (Addi780

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tional Provision One of Royal Decree 291/1992, of Mach 27, on issues and public offerings of securities). The restrictions that may be established in the articles of association to the free transfer 34 of shares are subject to the following limits: (i) Restrictions to the free transfer of shares should be expressly recorded in the articles of association to be enforceable against the Company. (ii) The restricting clauses should be recorded in the share certificates vesting shareholder status. In view of this, the articles of association may contain restricting clauses of the follow- 35 ing kinds: a) Firstly, clauses requiring authorization or consent from the company. In this case, the authorizing body will be the Board of Directors, unless otherwise established in the articles of association, which may confer such power upon the General Meeting and even establish qualified majorities. The articles of association need not to state the specific events in which authorization may be denied if they provide for other measures of protection from the risk of abuse of power in refusing authorization (for example, by entitling the transferor to have the company acquire the shares if it refuses to authorize their transfer). Examples of admitted clauses of this kind are: (i) prohibition for a member to reach a certain stake in the capital (severance of the shareholder balance), due to the transfer; (ii) restrictions to the entry of third parties for reasons of their profession, etc. b) Secondly, shareholders may be required to meet specific conditions or features; these should be objective so that, if they are met by the proposed incoming shareholder, the shares in question will be automatically transferred and no procedure for the exercise of preemptive acquisition rights will have to be observed. c) Lastly, clauses establishing a preemptive acquisition right or a right of first refusal, which may apply before or after the transfer. The beneficiaries may be all the other shareholders, the Company, only certain shareholders or third parties. However, in the absence of a provision on the matter in the articles of association, the Company is not permitted to select those shareholders that will have a preemptive acquisition right. Additionally, clauses in the articles of association that permit partial exercise of the preemptive subscription right will be null. It should be noted that the transfer of shares entailing ancillary services will require 36 authorization to be granted by the Company, through its body of directors. Since it is unnecessary for the articles of association to record this requirement, it will not be necessary either to establish the specific events in which such authorization may be refused. The decision on this matter is therefore absolutely discretional for the Company, although it is governed by the principles prohibiting arbitrary action and abuse of power. Refusal of authorization does not grant the shareholder the right to separate from the company: the resolution refusing authorization may be challenged in court, or the shareholder that intended to transfer his shares may bring action for liability if he considers that such refusal has caused him disproportionate damages (Decision of the Directorate General for Registries and Notaries Public, of May 17, 1993). Israel Garca Rico

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II. Organization and legal Personality

37 Therefore, the articles of association are not permitted to contain clauses absolutely prohibiting the voluntary transfer of shares, impeding the shareholder from receiving their actual /reasonable value or obligating the offering shareholder to transfer a number of shares other than that offered. By way of exception, article 123.4 of the Commercial Registry Regulations may be cited, which admits clauses that prohibit the voluntary transfer of shares for a maximum term of two years as from the Company’s incorporation. Compulsory and ‘‘mortis causa’’ transfers cannot be prohibited. b)

The S. L. (articles 26 to 34 of the LSRL)

aa)

Closed company principle

38 Articles 29 et seq. of the LSRL define the S. L. as an essentially closed company. Therefore, its membership units may not be freely transferred to third parties. Clauses in the articles of association restricting their transfer therefore always prevail over the procedure established in the applicable legal system, which is of a dispositive and supplementary nature. bb) Limitations to transfer prohibition.

39 In general, the voluntary transfer of membership units is permitted if the articles of association recognize the right of the members to separate from the company at any time. The prohibition of the voluntary transfer of membership units, without granting a right of separation, is also permitted for a maximum term of five years as from the formation of the company. cc)

Legal procedure for the transfer of membership units

40 The legal procedure for the transfer of membership units (which, it should remembered, is of a dispositive and supplementary nature, establishing the provisions to be observed as a minimum) is defined by the following features: (i) the membership units may be freely transferred to another member or to the spouse, forebears or descendants or to companies in the same group; (ii) the company has the right of prior authorization, to be granted through its General Meeting; and (iii) the members have preemptive subscription rights, which should be exercised on a pro rata basis according to the membership interest they already hold. 41 The provisions in the articles of association may supplement and qualify the legal system as described. It is therefore customary for them to establish that preemptive acquisition rights may be exercised only by those members who meet certain conditions: the equal treatment of the members may therefore be modified as regards the exercise of acquisition rights. 42 The articles of association may also recognize a preemptive acquisition right to the company or to a third party meeting certain conditions. This may be of great interest where the transfer involves membership units subject to ancillary services. 43 The articles of association may also establish that the membership units be held for life, to be redeemed by the Company through a reduction of capital, upon the member’s death. 782

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dd) Purchase value

Lastly, attention should be brought to an additional feature of the procedure established 44 for the transfer of membership units: firstly, no reference is made to the actual or reasonable value when establishing the price in purchases and sales ‘‘inter vivos’’. This is only provided for in compulsory transfers and transactions for a valuable consideration other than sales.

III. Bodies of Governance The S. A. has the same bodies of governance as the S. L., although minor differences 45 exist as regards their operating procedure, which is more flexible in the S. L.

1.

The General Meeting

The General Meeting is the supreme body of governance of the S. A. and of the S. L.: 46 no other body of government may impose its decisions over those of the General Meeting. Nevertheless, this body is not permanently established, since it will only assemble upon request by the Directors or on consent, when agreed by the shareholders or members. a)

Authorities and restrictions of the General Meeting

The first issue to be considered is that the General Meeting does not have absolute 47 supreme power, since its decisions are limited to the scope of the matters within its competence. Article 93 LSA establishes: ‘‘Article 93. General Meeting. 1. The shareholders, assembled as a duly convened general meeting, shall decide by majority on the matters within its competence. 2. Resolutions adopted by the General Meeting are binding on all the shareholders, including those dissident and those absent from the meeting’’. Along the same lines, article 43 LSRL establishes:

48

‘‘Article 43. General provision. 1. The members, assembled as a General Meeting, shall decide, with the majority established by law or in the articles of association, on the matters within its competence. 2. Resolutions adopted by the General Meeting shall be binding on all the members, including those dissident and those absent from the Meeting.’’

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III. Bodies of Governance

49 Neither the LSA nor the LSRL includes a detailed list of all the matters within the competence of the General Meeting, so that its sphere of action should be defined in negative terms, in other words, by ascertaining those matters that are not reserved by Law or under the articles of association to other bodies of governance, such as the Board of Directors or the Executive Committee. 50 In any event, it is of interest to note that the General Meeting has competence to decide, among other issues, on the following matters: – Removal and appointment of Directors. – Amendments to the articles of association. b)

Call for General Meetings

aa)

Persons to call

51 Articles 94 and 100 of the LSA and article 45 of the LSRL establish that the directors should call both ordinary and extraordinary general meetings. Therefore, other than in the special events of bondholder syndicates, companies in liquidation and judicial calls (which apply precisely when the Directors fail to call the meeting) the General Meeting may and should be called by the Directors. Even in those cases in which certain minority shareholders or members, representing in the aggregate at least 5% of the capital of a company, request that the General Meeting be called, this request should be channeled through the Directors: in such an event, the minority shareholders or members should place the matter, complying with a series of formalities, before the Board of Directors of the Company (if this is the form adopted by the body of directors in the company) and request it to make the necessary call. bb) Call procedure

52 The following summary may be given of the procedure to call General Meetings: (a) In general, the Board should adopt a resolution for the purpose before calling the General Meeting. Failure to adopt the resolution is a call deficiency against which action may be taken to challenge the corporate resolutions. (b) The Chairman of the Board may decide that the Board should make the call, but in his capacity as a Director he does not have authorities to call the General Meeting himself. (c) The power to call General Meetings may be delegated to one of the Directors. However, this apparently refers to the delegation of authorities to a Managing Director or to an Executive Committee. cc)

Call publishing

53 Lastly, it should be noted that the call for a General Meeting of an S. A. should be published in the Official Gazette of the Commercial Registry and in a newspaper widely circulated in the province where the company has its registered office, at least fifteen days in advance of the date set for the meeting to be held at first call. It is important to mention that any deficiency in the call for the General Meeting may render the resolutions it adopts null, if they are challenged.

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c)

Assembly of the General Meeting and system of majorities

aa)

Assembly and ballots. Ordinary resolutions

Spain

54

Other than for the purpose of adopting of resolutions for which a qualified majority is 54 required, the General Meeting of an S. A. will be validly assembled at first call when it is attended by shareholders present in person or by proxy, representing more than 25% of the voting capital. At second call, no minimum limit is established for the valid assembly of the meeting and resolutions may be validly adopted with the votes of a small percentage of the shareholders, provided that they are adopted with the votes of the absolute majority of the capital present at the meeting. In this respect, a resolution not requiring a qualified majority may be adopted by simple 55 majority of the shareholders present in person or by proxy. The capital not represented at the General Meeting will therefore not have the right to vote at that meeting. Thus, capital that is not represented (because the shareholders in question fail to attend) cannot be considered to be in opposition or to have voted against the adoption of the resolution. Abstentions, however, do play an important role, since they may hinder the adoption of the resolution: the rule of the majority of the capital present at the meeting in fact implies the need for an absolute majority of those in attendance. Thus, a resolution voted for by a simple majority instead of an absolute majority, because a certain number of the shareholders present abstained, will be considered rejected by the General Meeting. bb) Assembly and ballots. Qualified resolutions

Resolutions needing a qualified majority are those particularly relevant for the Com- 56 pany and the shareholders, such as for example the issue of debentures, the increase or reduction of capital, the transformation, merger or spin off of the Company and, in general, any amendment to the articles of association. For these resolutions to be adopted, the General Meeting in question must be attended by shareholders representing at least 50 % of the capital, at first call, and 25% of the capital, at second call. The following procedure applies for the adoption of these resolutions: – If the General Meeting is held at first call (in other words, because at least 50 % of the capital is present) the resolution may only be adopted with an absolute majority of the votes of the capital represented at the Meeting. – If the General Meeting is held at second call (in other words, because the necessary 50 % quorum for the meeting to be held was not reached at first call) and at least 50 % of the capital is represented at second call, the resolution must likewise be adopted with the required absolute majority of the votes of the capital represented at the General Meeting. – If the General Meeting is finally held at second call and more than 25% but less than 50 % of the capital is represented, the resolution must be adopted with the votes of two thirds of the capital represented at the General Meeting.

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cc) Unanimity prohibition

57 Additionally, the quorums for attendance and ballot may be increased (not reduced) in the articles of association, although qualified majorities should not be such that, in practice, “unanimity thresholds are reached”, to use the wording of the Decision of the Directorate General for Registries and Notaries Public of January 13, 1994. dd) S. L. specialties

58 The foregoing is qualified by the LSRL, which eliminates the second call for the General Meeting of an S. L., thus changing the system of majorities required by the LSA. 59 In the S. L., under the LSRL, resolutions should be adopted with a majority of the votes validly cast, provided that these represent at least one third of the votes conferred by the membership units, blank votes not to be computed. 60 Additionally, pursuant to article 53.2 of the LSRL, more than half the votes of the membership units will be necessary to adopt resolutions to increase or reduce the capital and to amend the articles of association. 61 Under the same article, the transformation, merger or spin off of the company, the cancellation of preemptive rights in increases of capital, the exclusion of shareholders and the authorization for the directors to conduct business similar to that making up the corporate purpose should be adopted with at least two thirds of the votes of the membership units.

2.

The Board of Directors

62 The Board of Directors has an extremely relevant role in achieving the corporate purpose of the company. It is therefore necessary to consider the main features of its procedure and the manner in which it should be organized. a)

Call for Board meetings

aa)

Persons to call

63 The Board of Directors will assemble when it so resolves and whenever this is requested by the Chairman or by any of its members. Although a member other than the Chairman may request the meeting, it is always the Chairman who should make the call. bb) Call procedure

64 Calls are subject to the procedure freely established in the articles of association, although it is customary for a notice of call to be served individually on each Director, observing a minimum term of advance notice. cc) Universal meetings

65 The Board of Directors is always able to adopt resolutions validly if all its members are present and agree to assemble to hold a Board meeting, namely, by holding a meeting on consent. 786

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b)

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Quorum

The Board of Directors will be validly assembled when half plus one of its members are 66 present in person or by valid proxy. If the Board has decided to assemble, without prior call, for the meeting to be valid, all its members should be present and unanimously decide to hold the meeting, also unanimously accepting its agenda. c)

Adoption of resolutions

Unless the articles of association state the contrary, the provisions of the LSA in respect 67 of those resolutions that have to be adopted by the Board of Directors require the votes of an absolute majority of those present in person or by proxy.

IV. Liability of the Directors 1.

Legal system

a)

Grounds

The system governing the civil liability borne by the directors of capitalist companies, 68 common for both the S. A. and the S. L., is grounded on article 133 LSA, which establishes: ‘‘1. The directors shall be liable to the company, to the shareholders and to the company’s creditors for any damages they may cause by acts or omissions contravening the law or the articles of association or performed in breach of the duties inherent in their office. 2. Any person who acts as a director in fact of the company shall be personally liable to the company, to the shareholders and to the creditors for the damages he may cause by acts performed contravening the law or the articles of association or in breach of the duties established by law for those formally holding the office of director. 3. All the members of the body of directors that performed the act or adopted the detrimental resolution will be jointly and severally liable, except for those who evidence that they did not participate in its execution and adoption and were unaware of its existence, or were aware of its existence but adopted all advisable measures to avoid the damage or, at least, opposed the resolution. 4. The fact that the detrimental act or resolution has been adopted, authorized or ratified by the general meeting shall not release the directors from liability.’’ b)

Company action

Article 134 of the LSA provides for the action that may be taken by the company to 69 claim liability from directors who perform detrimental acts or transactions, establishing Israel Garca Rico

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that ‘‘action for liability against the directors shall be taken by the company, after a resolution has been adopted by the general meeting’’. This resolution may be adopted with a simple majority of the votes cast at the meeting. c)

Individual shareholder or third party action for corporate interests

70 Secondarily, shareholders representing more than 5% of the capital may request that the general meeting be called when the directors fail to call it or may themselves bring action when, although the meeting is called, it decides not to take action for liability, or, having decided to take action, such action is not taken within one month. Likewise, third party creditors may take corporate action for liability when such action has not been taken by the general meeting or by the shareholders or members and ‘‘the capital of the company is insufficient for it to honor its debts’’. d)

Individual shareholder or third party action for their own interests

71 Additionally, article 135 LSA excludes from the scope of application of article 134 action for compensation to which shareholders and third parties may be entitled for acts performed by directors directly damaging the interests of such shareholders or third parties. For such exclusion to apply, the shareholders or members should sustain directly the damage caused by a detrimental act on the part of the director: therefore, economic damage should be caused directly to the shareholders or members and not indirectly, as occurs in those events in which the directors cause damage to the capital of the company. The exclusion would therefore not apply when the damage consists of a reduction in the value of the shares due to economic damage caused to the company itself, and therefore this event does not come within the sphere of our conclusions.

2.

Features of liability

a)

Events of liability

72 Directors have traditionally been considered to bear liability in the following statutorily classified events: (i) legal transactions or acts contravening the Act; (ii) legal transactions or acts contravening the articles of association, which is apparently not the case here; and (iii) legal transactions or acts performed without observing the standards of diligence inherent in the office. This latter event, which was established in article 127 of the LSA, has been recently qualified by Act 26/2003, of July 17, reforming the LSA previously in force and including a new set of duties that are in fact specifications of the general duty of diligence such as the duties of diligent management, faithfulness to the corporate interests, loyalty and secrecy (articles 127 bis a quater of the LSA). b)

Negligence

73 In any event, for a director to be liable, he should perform such unlawful acts or transactions negligently. This requirement of negligence has been emphasized by the Fifth Council Directive of 1989 concerning the structure of public limited companies 788

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(which set the guidelines for the reform of the current Spanish LSA in force) and by copious case law (Judgment of the Supreme Court of November 21, 1997, and the judgment of the Provincial Appellate Court of Castelln of July 5, the same year, inter alia). In view of this, the most relevant way to attribute liability to directors would be through 74 considering them to have failed to observe the required standards of diligence in the discharge of the duties of management pertaining to the body of directors. In this respect, the duty of diligence is not confined to the statutorily classified events provided for in articles 127 to 127 quater of the LSA. Other obligations may also be demanded from the directors and would definitely fall within the sphere of what should be considered a diligent management of the company’s interests. Particularly, the following duties are usually considered (i) duty to be informed of the corporate affairs; (ii) duty of investigation; and (iii) duty of surveillance. The required standards of diligence are not however limited to the above events: the 75 director should participate actively in the management of the company. A passive attitude, including that of mere information or investigation, does not appear to comply in full with the terms of article 127 of the LSA. This means that, if it is known that certain legal transactions or acts are likely to cause specific damages to the interests of the company, the duty of an “orderly entrepreneur” (article 127 of the SA Act) will be to adopt all such measures as may mitigate, to the extent possible, the eventual damage that will be caused to the company. c)

Joint and several liability

Lastly, it should be pointed out that evidence of liability should be provided for each of 76 the directors, since the Spanish system of corporate liability is person based. If the directors act jointly, under article 13.2 of the LSA, all the members of the body of directors will be presumed to be negligent and the rule of joint and several liability will also apply for the company to obtain effective compensation for the damages caused to it by its directors. The recognition by law of the joint and several nature of the liability is parallel to the developments of case law and provides greater rigueur when analyzing the liability borne by the directors. The prerequisites for joint and several liability to exist are that there should be more than one director in the company and that an element of mens rea or negligence should exist, so that those directors who evidence that they did not participate in the detrimental acts may be released from liability.

V.

Amendments to the Articles of Association

The procedure for the amendment of the articles of association of the S. A. differs 77 considerably from that applicable to the S. L. This is due not only to the different requirements that should be met for amendments of the articles of association par excellence (those affecting the capital of the S. A.) but also to the fact that the amendment procedures in the S. A. have to be publicized, to guarantee that the amendIsrael Garca Rico

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ment in question reaches all the shareholders, who are naturally dispersed and not involved in the company’s management.

1.

Amendment to the Articles of Association of the S. A.

a)

Ordinary requirements

78 Amendments to the articles of association of an S. A. should be resolved by the General Meeting, complying with the following requirements pursuant to article 144 of the LSA: – The directors should issue a report to justify the amendment to the articles of association to be proposed to the General Meeting. – Other than in exceptional cases, General Meetings should be called duly in advance, stating in the call the articles to be amended. – The call should state the right of all the shareholders to examine at the registered office the full text of the proposed amendment to the articles of association and the report on the amendment, previously drawn up by the directors. – The shareholders will also be entitled to request delivery or remittance of said documentation free of charge. – The resolution of amendment should be adopted in compliance with the provisions of article 103 of the LSA as regards quorum and qualified majorities. b)

Specific requirements

79 The above notwithstanding, certain amendments entail also a series of specific restrictions and special requirements: (i) Any amendment to the articles of association whereby the shareholders assume further obligations and, particularly, ancillary services will require consent from the parties concerned, which should vote in favor. (ii) The restriction to the free transfer of registered shares, validly adopted by the General Meeting with the general requirements mentioned above, will not be binding on the shareholders that opposed the adoption of the resolution, for a period of three months after its publication in the Official Gazette of the Commercial Registry. In said three-month period, the shareholders temporarily not subject to the restriction to the free transfer of their shares may freely, without observing the restriction, sell or otherwise dispose of their shares. (iii)Resolutions to replace the corporate purpose (note that the LSA does not refer to extending the purpose for it to include new activities and uses instead a wider and more radical term, namely, “replacement”, in other words, the orientation of the company’s business to a completely new activity outside the scope of its previous purpose) entitle the shareholders who oppose them to separate from the Company within one month as from the date on which the resolution of replacement is published in the Official Gazette of the Commercial Registry. Exercise of the right of separation entitles the shareholder separating from the company to receive the reasonable value of his shares. 790

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(iv) Additionally, any amendment to the articles of association that directly or indirectly damages the rights of a certain class of shares requires the votes in favor not only of a qualified majority of the shareholders present at the General meeting but also of a majority of the shareholders owning the shares of the class to which the amendment applies. This reduced majority should meet the requirements of article 144 of the LSA mentioned above, which leads us to conclude that it is also a qualified majority, computed according to the criteria laid down in article 103 of the LSA, transcribed above. (v) Lastly, resolutions to change the registered office need not be adopted by the General Meeting, unless otherwise provided for in the Articles of association, where the registered office is to be relocated within the same municipal district. In such cases, a resolution adopted by the Body of Administration will suffice. To the contrary, the relocation of the registered office in another municipal district or abroad will require a resolution to be adopted by the General Meeting. In this respect, the resolution to transfer the registered office of the company abroad may only be adopted where Spain is a signatory to an international Treaty that permits this, while the company maintains its legal status. Shareholders who do not vote in favor of the resolution and shareholders without voting rights will hold, in these cases also, a right to separate, which may be exercised in the same events as those described above. c)

Formalities

In view of the foregoing, any amendment to the articles of association of the S. A. 80 should be executed in a public deed, through an instrument endorsed by a Notary Public. Together with this formality, article 150 of the LSA establishes that changes of corporate name or registered office and the replacement or amendment of the corporate purpose should be published in two newspapers widely circulated in the province where the company has its registered office. The announcements published should be included in the public deed executing the amendment. The public deed will subsequently be filed for entry at the Commercial Registry. The entry will also be published in the Official Gazette of the Commercial Registry. Notwithstanding the above, the two amendments to the articles of association par 81 excellence, the increase and reduction of capital, have a set of features that differentiate them from the amendments discussed above. In this respect, the LSA covers further in depth both the increase and the reduction of capital, the procedure for which is explained in detail below. d)

Increase of capital

aa)

Capital increase procedure

Article 151 of the LSA establishes two alternatives to increase capital: – Increase of capital by the issuance of new shares. To such effect, the shareholders of the Company, when the resolution to increase capital is adopted, have a preemptive subscription right over the new shares to be issued, on a pro rata Israel Garca Rico

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basis according to the number of shares they already hold in the Company. These rights, which may be assigned upon the same conditions as the shares vesting them, may be exercised after at least one month has elapsed from the date on which the offering was published in the Official Gazette of the Commercial Registry or should otherwise be notified to all the company’s shareholders (where the shares are registered stock) by individual notice sent to each one of them by the body of directors. Subscription rights may however be excluded in certain events when this is required in the interests of the Company and provided that a series of requirements is met, among which it should be noted that the directors should issue a report, for which they will be held accountable, justifying the increase and recording the persons to whom the new issued shares should be allocated, supported by the report issued by the company’s auditors appraising the reasonable/actual value of the shares and referring to the data contained in the report issued by the directors. – A procedure used to a lesser extent is to increase the par value of the existing shares. 83 Precisely because this increase may be considerably burdensome for certain shareholders who, although they hold shares in the Company, do not have sufficient own or borrowed funds to bear the increase of the par value of the shares they already hold, this procedure to increase capital requires consent to be granted by all the shareholders, unless it is performed charged to reserves or to profits of the Company, since no additional payment need be made in such cases. bb) Contributions

84 In view of this, the increase, in either alternative, may be made through contributions in cash or in kind. (a) The increase of capital through contributions in cash requires full payment of the existing shares although the increase may be performed if uncalled capital does not exceed 3% of the capital of the company. Payment in cash may be charged to reserves of the Company, in which case article 157 LSA establishes that available reserves, issuance premiums and the amount of the mandatory reserve in excess of 10 % of the capital once increased may be used for the purpose. To such effect, the transaction should be based on an approved balance sheet referring to a date within the six months preceding the resolution to increase capital, audited by the company’s auditor or by a independent auditor upon request by the directors, if the company is not under the obligation to have its Annual Accounts audited. (b) For the capital to be increased through contributions in kind, simultaneously with the call for the General Meeting to be held to adopt the resolution, a report issued by the directors should be made available to the shareholders describing in detail the intended contributions, the person who should make them, the number and par value of the shares to be delivered and the security provided according to the nature of the assets to be contributed (article 155 LSA). A special procedure to make contributions in kind consists of contributing debts held against the company, whereby the company cancels its debt, since the iden792

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tities of the creditor and of the debtor of the amount in question are confused after the contribution. To such effect, article 156 LSA establishes that (i) at least 25% of the debts to be set off should be due and payable and the remaining debts should not mature at more than five years; and (ii) a certificate issued by the Company’s auditor should be made available to the shareholders simultaneously with the call, evidencing that after auditing the accounts they have found that the data submitted by the directors on the debts to be set off are accurate. e)

Reduction of capital

aa)

Reduction purposes

The reduction of capital in an S. A. is also a regulated procedure that, since in a sense it 85 involves a stripping of the company’s assets, should be used only for a series of statutorily classified purposes: (i) to return contributions to the shareholders; (ii) to cancel interim dividend; (iii) to create or increase the mandatory or voluntary reserves; (iv) to restore the capital /net worth ratio when it is reduced due to losses. The reduction of capital for this last purpose is mandatory when losses have reduced the net worth of the company to less than two thirds of its subscribed capital and the deficit is not remedied within one fiscal year. The reduction should be applied equally to all the shares into which the capital of the company is divided, proportionally to their par value, respecting the eventual privileges established in the articles of association for the purpose. bb) Reduction procedure

The reduction may be made simultaneously with the increase of capital, by reducing the 86 par value of the shares or by redeeming them or pooling them to exchange them for a smaller number of new shares in the capital of the company. The general requirements for the reduction are set forth below: – The reduction should necessarily be resolved by the General Meeting, the resolution to contain a series of minimum statements relating to the reduction: amount and purpose, procedure for its performance, term of performance and amount that may eventually be payable to the shareholders. – When the reduction implies a redemption of shares and affects the shareholders of the Company in different degrees, consent should be granted by the parties concerned, by individual ballot, the reduction to be agreed by a qualified majority, following the criteria of article 103 of the LSA. – The resolution to reduce capital, unlike the resolution to increase capital, should be published once in the Official Gazette of the Commercial Registry and in two newspapers of wide circulation in the province where the Company has its registered office. After the date on which the last of such announcements is published, those creditors whose debts originated before that date will have the right to oppose the reduction (within a term of one month) until the debts owed to them but not due on the date of publication have been secured, unless they have already been adequately secured. This right of opposition of the creditors will not

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apply in those events in which (i) the reduction has the purpose of restoring the capital /net worth ratio; (ii) the reduction is made charged to profits or to freely available reserves or by redeeming shares acquired by the company for no valuable consideration. cc)

Specific cases

87 In addition to the above general requirements, three specific reduction procedures exist that, according to the special events in which they are performed, are subject to a particular legal system: (a) Reduction of capital to set off losses and to provide the mandatory reserve: This reduction of capital, which cannot be performed when the company has voluntary reserves or when the mandatory reserve, after the reduction, exceeds 10 % of its capital, may only be performed on the basis of an audited balance sheet previously approved by the General Meeting. In this respect, the reduction should never give rise to a distribution of dividends or a cancellation of interim dividends. (b) Simultaneous reduction and increase of capital: occasionally, to set off the Company’s losses which have reduced its net worth, capital has to be reduced to less than the minimum statutory amount. In such cases, to reduce the capital under that limit or even to nil, it is necessary to increase it simultaneously up to the minimum statutory amount or, otherwise, to transform the company by re-registering it as a company of a different kind, withy a lower minimum statutory capital. (c) Reduction by acquiring equity stock (article 170 of the LSA): the reduction of capital by acquiring equity stock is a specific measure that, due to its structure, based on offering capital for its purchase by the shareholders, requires special security to be granted. This security is intended to impede any shareholder from being expulsed from the Company discretionally by the General Meeting. The offering should therefore be made to all the shareholders or, at least, to those of a certain class of shares, in which case consent should be granted by a qualified majority of the shareholders affected by the measure. The tenders to purchase should be published in the Official Gazette of the Commercial Registry and in two newspapers of wide circulation in the province where the Company has its registered office. These publications may be replaced by an individual notice to each of the shareholders affected by the measure. The reduction may only be performed and completed after one month has elapsed from the publication or notice.

2.

Amendment to the Articles of Association in the S. L.:

a)

Formalities and requirements

88 Considering the flexible nature of the S. L., used for family partnerships or small and medium-sized companies, the amendment to the articles of association for these companies is subject to a much simpler and more expeditious procedure than that of the S. A., where it is necessary to guarantee the interests of capital investors. To the con-

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trary, the legal regime for amendments to the articles of association in the S. L. has the purpose of enabling the company to adapt to its particular and changing circumstances in a relatively short time. Article 1 of the LSRL Act does not require any announcement to be published for the 89 amendment, which merely has to be resolved by the General Meeting, stating clearly in the call the amendments to be made. The members are entitled to examine the full text of the proposed amendment at the registered office. Where the amendment will give rise to new obligations for the members or affect their individual rights, it should be adopted with consent from the parties concerned or affected by the measure. The amendment should be executed in a public instrument, which should subsequently 90 be entered at the Commercial Registry. b)

Increase of capital. Differences with regards to S. A. legal system

As occurs under the legal regime governing the S. A., the LSRL regulates in greater 91 detail the procedure to be followed for the increase and reduction of capital. Like the LSA, article 73 of the LSRL establishes that the capital may be increased by creating new membership units or by increasing the par value of those already in existence, and in both cases contributions may be made in cash or in kind. The most noteworthy features that differentiate this system from the procedure applicable to the S. A. are set forth below: (i) If the increase is to be made by setting off credits, these should be due and payable. A report issued by the body of directors on the nature and features of the Company’s debts to be set off, the identity of the contributors, the number of membership units to be created and the amount of the increase should be made available to the members at the registered office, simultaneously with the call for the General Meeting, recording expressly that the data of the debts conform to the company’s books. The report should be attached to the public deed executing the increase. (ii) This report should also be made available to the members when the increase is to be made through contributions in kind. The public deed executing the increase should record the assets and rights that have 92 been contributed and, where the increase is made by creating new membership units, the identity of the parties that have acquired them, the numbers of the membership units created and a statement by the body of directors that the holders have been entered on the Members Register (article 78 LSRL). c)

Reduction of capital

More stringent restrictions than those established for the S. A. are imposed for the 93 reduction of capital in the S. L., due mainly to the fact that the valid purposes for which the reduction may be made are limited. Article 79 of the LSRL only establishes two events: the refund of contributions to the members and the restoration of the capital / net worth ratio imbalance due to losses. Israel Garca Rico

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(i) The reduction of capital to refund contributions to the members entails the obligation of the members to which the contribution has been refunded to assume joint and several liability (among the members and with the Company) up to the limit of their respective contributions, for payment of the corporate debts acquired before the date on which the reduction became effective for third parties. The above liability will not arise if a reserve is provided charged to profits or to freely available reserves in an amount equal to that received by the members as refund of their contributions. This reserve will not be available until five years have elapsed from the date on which the reduction is published in the Official Gazette of the Commercial Registry. Under article 81 of the LSRL, the articles of association may establish that, for the resolution to reduce capital by returning contributions to be valid, at least three months should be allowed to elapse from the date on which the reduction is notified to the creditors. This notification should be made personally or by publishing the appropriate announcements in the Official Gazette of the Commercial Registry and in a newspaper of wide circulation in the province where the Company has its registered office. (ii) Capital reductions to set off losses are not permitted while the company has reserves of any kind available. The balance sheet used as a basis for the transaction should refer to a date within the six months immediately preceding the resolution and should be approved by the General Meeting after it has been audited by the Company’s auditor or by the party designated for the purpose by its directors. The balance sheet and the auditors’ report should be attached to the public deed of reduction. (iii) The simultaneous reduction and increase of capital is also permitted with the same general requirements established in the LSA.

VI. Conversion, Merger and Spin Off 1.

Conversion

a)

Conversion Principles

94 Conversion is the legal transaction whereby the company changes its legal corporate form to another that, as from its conversion, will govern its structure, the organization of its powers, the relations with its shareholders, with third parties, etc. 95 This transaction is envisaged for those cases in which the company seeks to adopt a legal structure that responds more efficiently to its needs, which may vary throughout the company’s existence. The structural and functional differences between the various forms of company and, with them, the differences relating to the organization, distribution of powers or relations among the members, mean that a certain corporate organization will respond more adequately to certain vicissitudes of the company. Conversion is required when the corporate structure initially adopted does not meet the company’s needs.

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aa)

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96

Continuity

Conversion implies not the dissolution of the company and the appearance of a newly 96 created company but rather a change in the company’s legal form without affecting its identity. In other words, the converted company maintains its legal personality regardless of the new form of company it adopts. This is laid down in article 228.1 of the Business Corporations Act: ‘‘The conversion of the company pursuant to the above articles shall not change the legal status of the company, which shall continue to exist under its new form’’. This is likewise established in article 91.1 of the SL Act. bb) Legal status of the company members

Since a company’s conversion does not imply any change in its legal status, the legal 97 position of the members in the new corporate form adopted should be proportional or equal to that they held in the company under its previous corporate form. The foregoing has the purpose of avoiding economic damages caused to the members caused by the conversion. The stake held by each member in the capital should be respected, regardless of the extent of the company’s conversion. cc)

Corporate liability

Another matter of great interest as regards a company’s conversion is the liability borne 98 by its owners for the corporate debts. Various systems of liability exist according to each different corporate form. It is therefore essential to know what will occur if a company’s conversion entails a change in the system of liability of the company’s owners for the corporate debts: – If an S. A. or an S. L. is reregistered as a general or limited partnership, the liability system becomes of a personal, secondary, joint and several nature. In such case, the shareholders will be personally, secondarily and jointly and severally liable for the corporate debts existing before its re-registration. The creditors therefore benefit from the greater degree of liability assumed by the partners of general or limited partnerships. – If a general or limited partnership is reregistered as an S. A. or as an S. L., the members will continue to personally, secondarily, jointly and severally liable for the corporate debts acquired before re-registration, unless the company’s creditors expressly grant their consent to its re-registration. This ensures that the trust placed in the company by the creditors when they entered into agreements with it, while its members were personally, secondarily, jointly and severally liable, is maintained. – Lastly, the re-registration of an S. A. as an S. L. will not entail any change or amendment to the system of liability and the members will continue to be liable for the corporate debts only in the amount of their contributions to capital. b)

Conversion procedure

The conversion procedure is laid down in the LSA, the LSRL and the Commercial 99 Registry Regulations. It should also be considered that the company’s re-registration will be subject to the system governing the corporate form that is abandoned and that the legal requirements to organize the company under its new corporate form should be met.

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100 Certain formalities should be complied with to convert the company, as mentioned below: 1. Resolution to convert the company. 2. Announcement of the company’s conversion. 3. Public deed of conversion. 4. Re-registration at the Commercial Registry. aa)

Resolution to convert the company

101 The resolution for conversion should be adopted at the General Meeting with the votes of a qualified majority. 102 Since the majority system applies to adopt the resolution for conversion, and consent from all the shareholders is not required, the law grants the shareholders a right to separate from the company if it is to be re-registered as a limited or general partnership. If an S. A. is to be re-registered as an S. L., the shareholders will not have the right to separate and, instead, those who are in disagreement will be exempt, for three months, from the application of the legal provisions governing the transfer of membership units. This permits the shareholder in disagreement to transfer its membership units under the regime applicable to the S. A. which undoubtedly does not establish such stringent restrictions as the regime governing the S. L. bb) Publicizing

103 Article 224.2 of the LSA requires the resolution of conversion to be published three times in the Official Gazette of the Commercial Registry and in at least two newspapers of wide circulation in the province where the Company has its registered office (it is unnecessary to publish the resolution when an S. L. is to be converted). This requirement may be avoided if all the shareholders vote in favor of the resolution, since its purpose is to protect the shareholders, enabling them to adopt measures to safeguard their interests, as mentioned in the above section; this will be unnecessary if all the shareholders are in agreement with the company’s conversion. cc)

Public deed of re-registration

104 The company’s conversion should be recorded in a public deed, which should meet all the requirements necessary for the organization of a company in the new corporate form. If an S. A. is to be re-registered as an S. L., article 220 of the Commercial Registry Regulations requires the following data to be included in the public deed: – The date on which the resolution was published in the Official Gazette of the Commercial Registry and in the respective newspapers. – A statement that the share certificates have been cancelled and destroyed or, if the shares were represented by book entry, that the entries have been written off the relevant stock register. – A statement that the net worth covers the capital and that the capital has been fully paid up. 105 The public deed for conversion should be executed by a person with authorities to execute corporate resolutions in a public instrument.

798

Israel Garca Rico

2. Merger

Spain

106

The public deed for conversion should be filed for entry at the Commercial Registry, 106 together with a general balance sheet of the company closed on the day before the date of execution of the public deed and another balance sheet closed the day before the date of execution. The first of these balance sheets is informative and refers to the capital status of the company when the resolution was adopted, for the members to be able to exercise their right to separate, while the second provides information on the equity status of the company after the shareholders have exercised their right to separate. The two balance sheets may be consolidated if the resolution for re-registration is adopted unanimously and the dates of adoption of the resolution and execution of the public deed coincide. The copies of the newspapers publishing the resolution and, if book entries were 107 cancelled, a certificate recording this issued by the body responsible for the register in question should also be attached to the public deed. dd) Re-registration

It is the company’s re-registration that concludes the procedure. The company’s orga- 108 nization in its new corporate form becomes effective only upon its re-registration.

2.

Merger

a)

Principles

aa)

Definition

The merger is a legal transaction involving two or more companies, in which one of 109 more of them are dissolved and the shareholders /members and equities merge with and into a single one of them or merge and are consolidated as a new company. Two different merger procedures exist. Firstly, the merger, strictly speaking, which involves the dissolution of one or more of the merging companies, namely, the non-surviving companies, and the continuation of one of the merging companies, the surviving company, which will take over all the shareholders or members and equity of the dissolved companies. Secondly, the merger by consolidation, in which all the merging companies are dissolved and then consolidated to form a new company, which will be comprised of all the shareholders and equities of each and every one of the dissolved companies. bb) Universal succession

The equity of the companies that are dissolved for merger purposes is transferred by 110 universal succession (all the assets and liabilities, rights and obligations of the dissolved companies are transferred en bloc) in a single transaction, without having to transfer each of the assets, rights and liabilities individually. cc)

Consideration

The shareholders of the non-surviving company may only join the surviving company 111 through an allocation of shares or membership units in the surviving company, in consideration for the contribution they have made to capital. The number of shares Israel Garca Rico

799

112

Spain

VI. Conversion, Merger and Spin Off

or membership units allocated to them will be proportional to the respective stake each one of them holds in the capital of the non-surviving company. When it is advisable to make adjustments, a consideration in cash may be delivered to the new members, which compensation should not exceed 10% of the par value of the shares or membership units. To allocate the new shares or membership units, a conversion rate is applied to exchange the shares or membership units in the dissolved company for those in the surviving company. The conversion rate should be calculated on a net worth basis. Nevertheless, in certain events, such as that in which the surviving company is the holder of all the shares in the non-surviving company, it is unnecessary to set a conversion rate. b)

Merger procedure. Stages of the merger

112 For a merger procedure to be successfully concluded, it has to complete all its different stages, in strict compliance with the required terms. As regards these terms, it should be noted that a balance sheet has to be submitted, which may be the last approved yearly balance sheet, provided that it was closed within the six months preceding the date of the general meeting held to resolve on the merger. If the yearly balance sheet is used instead of a specific balance sheet, it should be considered that the balance sheet will generally be closed at December 31, 2003, and the merger using that balance sheet should therefore not be performed after June 30, 2004. aa)

Merger Project

113 The directors of the merging companies should draw up a merger project, which should contain at least the following statements: (a) name, registered office and registered data of the merging companies; (b) conversion rate of the shares or membership units to which the shareholders of the non-surviving company will be entitled in the surviving company; (c) procedure for the conversion of the shares or membership units in the non-surviving company, date after which the new shares or membership units will confer the right to a share in the profits and any particular feature relating to this right; (d) date after which the transactions performed by the non-surviving company should be considered made, for book purposes, on behalf of the surviving company, which date may be before or after the date of the merger project; (e) rights that will be conferred in the surviving company upon the holders of shares or special rights, the holders of preferred shares and the holders of special rights other than shares or membership units in the non-surviving companies or, as the case many be, options offered to them; and (f) advantages of any kind that will be granted in the surviving company to the experts who issue the merger project and to the directors of the merging companies. 114 The merger project should be signed by all the directors of the merging companies. The merger project should be entered at the Commercial Registry of the locality where each of the companies has its registered office before the merger is approved by their General Meetings. It should be noted that the Commercial Registrar has a term of 5 business 800

Israel Garca Rico

2. Merger

Spain

115

days to classify the merger project, as from the date on which it is filed for entry. The entry of the project will be published in the Official Gazette of the Commercial Registry. bb) Reports on the merger project

Two reports will be attached to the merger project: (i) one drawn up by the directors of 115 each of the merging companies, to explain the legal and economic aspects of the project in detail, stating the rate of conversion of the shares and any particular difficulty for their valuation; (ii) another report drawn up by independent experts appointed by the Commercial Registry upon request by the directors of each of the companies or the directors of all the merging companies. The report issued by independent experts refers to the merger report and to the assets 116 and liabilities contributed by the non-surviving company. The report should always state whether or not the conversion rate of the shares or membership units is justified, the methods used to establish it and whether these are adequate. It should also state whether the equity contributed by the non-surviving company is sufficient to cover the capital stock in the surviving company. It will not be necessary to issue this report in those cases where the surviving company is an S. L. and none of the non-surviving companies is an S. A. cc)

Merger balance sheet

Another of the essential documents for the merger, mentioned at the beginning of this 117 section, is the merger balance sheet. The merger balance sheet should be submitted to the company’s auditors for examination, when the company is under the obligation to have its accounts audited. As mentioned above, the balance sheet need not be specifically drawn up for the merger and the last approved yearly balance sheet may be used, provided that it was closed within the six months prior to the date of the General Meeting held to approve the merger. If this requirement is not met, it will be necessary to draw up a balance sheet closed after the first day of the third month before the date of the merger project, using the methods and presentation criteria applied to the last yearly balance sheet. In both cases, the valuations contained in the last balance sheet may be changed due to major changes in the actual value that are not recorded on the books. This possibility of changing the valuations according to changes in the actual value not accounted shows that the balance sheet is for essentially informative purposes, to ensure that the conversion is performed on a fair basis. dd) Merger balance sheet auditing

The merger balance sheet should be examined by auditors and an auditors’ report should 118 therefore be attached to it. The merging company for which the balance sheet is drawn up is under the obligation to have its accounts audited. ee)

Merger resolutions

The merger should be approved by the General Meetings of the merging companies. 119 These should grant their approval within six months after the date of the merger project. After this term has expired, the project will no longer be effective pursuant to article 234.3 of the LSA. Israel Garca Rico

801

120

Spain

(1)

Call for the Meeting. Availability of documents

VI. Conversion, Merger and Spin Off

120 On publishing the call for the General Meeting, the directors should make the following documents available at the registered office for their examination by the shareholders, debenture holders, holders of special rights other than shares and the workers’ representatives: (i) the merger project; (ii) the report issued by independent experts on the merger project; (iii) the reports issued by the directors of each of the companies on the merger project; (iv) the annual accounts and the management report for the last three fiscal years of each of the merging companies, together with the respective report issued by the auditors; (v) the merger balance sheet of each of the companies, when it is not the last yearly balance sheet approved by the General Meeting, attaching the balance sheet audit report issued by the company’s auditors; (vi) the full text of the amendments to be made to the articles of association of the surviving company; (vii) the articles of association in force in the merging companies; and (viii) the list of names, surnames and ages, for individuals, or corporate names, for corporations and, in both cases, the nationalities and domiciles of the directors of the merging companies, the date as from which they hold their offices and, if appropriate, the same data for the persons who will be proposed as directors after the merger. Obviously, it will not be necessary to make available those documents that are not required pursuant to law or because of the corporate form adopted by the merging companies. 121 The directors of the merging companies are under the obligation to report to the General Meeting of their company any major change occurred in the assets or liabilities of any of the companies from the date of issuance of the merger project to the date of the General Meeting. 122 The call should be made at least one month in advance of the date of the General Meeting. The agenda should include the minimum statements required by law for the approval of the merger project and record the right of all the shareholders, debenture holders and holders of special rights other than shares to examine the above documents at the registered office and to obtain delivery or remittance of the full text of the documents free of charge. The agenda should also include those statements required by law for the resolutions that should be adopted, for example: dissolution of the nonsurviving company, increase of capital in the surviving company or amendment to the articles of association of the surviving company. (2)

Qualified majorities

123 The resolution should be adopted with a majority of votes, in compliance with the qualified quorum requirements established in the LSA Act and in the LSRL, as mentioned above. ff)

Publishing of the merger

124 After all the merging companies have adopted the resolution to merge, the adoption of the resolution should be published three times in the Official Gazette of the Commercial Registry and in two newspapers of wide circulation in the provinces where the companies have their registered offices. The announcement should record the right of the shareholders and of the creditors to obtain the full text of the merger resolution and of the merger balance sheet and a statement of the right of opposition of the creditors, 802

Israel Garca Rico

2. Merger

Spain

125

explained below. The resolved merger cannot be performed before one month has elapsed from the date of the last announcement of the resolution adopted by the General Meeting. gg) Creditors’ opposition

The right of opposition of the creditors should now be examined. This right seeks 125 protection of the creditors whose expected rights may be affected by the merger. Creditors may therefore oppose the merger for one month as from the date on which the last announcement of the resolution is published. Creditors will have the right of opposition where their debts originated before the date of the last announcement of the merger resolution, are not due on the date of which it is published and are not adequately secured. This right suspends actual performance of the approved merger until the rights of the 126 creditors who oppose it are satisfied or until all the creditors expressly waive their right. For the purposes of exercise of this right, the merger cannot be performed before one month has elapsed from the date of the last announcement of the resolution of the General Meeting approving the merger. hh) Execution of the public deed

The public deed of merger and increase of capital of the surviving company should be 127 executed and entered at the Commercial Registry. The public deed should contain: (i) the merger resolution; (ii) the merger balance sheet of the non-surviving companies; (iii) the amendments to the articles of association of the surviving company; and (iv) the number, class and series of the shares or membership units that should be delivered to each of the new shareholders. It should also contain the statements contemplated in articles 227 to 229 of the Commercial Registry Regulations. ii)

Tax formalities

To comply with the tax liabilities arising from the merger, a 600 form (Transfer Tax, 128 under the heading for corporate transactions) should be filed for the performed transactions. These transactions may be tax exempt under the tax neutrality regime established by Spanish law for Corporate Income Tax purposes. jj)

Merger registration

The public deed of merger and increase of capital should be filed for entry at the 129 Commercial Registries together with the self-settlement of Transfer Tax. After the public deed has been entered at the Commercial Registry, the merger will be 130 published in the Official Gazette of the Commercial Registry and the entries made at the Registry for the non-surviving companies will be cancelled so that the new situation after the merger is properly recorded.

Israel Garca Rico

803

131

Spain

kk)

Reports to Public Treasury for submission to tax neutrality regime

VI. Conversion, Merger and Spin Off

131 The final stage consists of the reports to be made to the Public Treasury by the merging companies on whether or not they will avail themselves of the tax neutrality system. These reports should be made within three months as from the date on which the merger is entered at the Commercial Registry.

3.

Spin off

a)

Principles

aa)

Definition. Spin off types

132 The spin off is the reverse of the merger. It has two alternative forms, each of which is subject to a different procedure. 133 A full spin off occurs when the company is dissolved dividing its entire net worth into two or more parts, each of which is transferred en bloc to a newly created company or to a previously existing company. Secondly, the partial spin off occurs when one or more parts of the net worth of a company are segregated without the company dissolving and the part segregated is transferred en bloc to one or more newly created or previously existing companies. This is laid down in article 252.1 of the LSA. bb) Spin off principles equivalent to those of the merger

134 The structure and nature of the spin off are to a certain extent parallel to those of the merger. The legal regime governing the spin off therefore refers in many cases to the regime governing the merger, such as for example article 154 of the LSA, which establishes: ‘‘the spin off shall be governed, with the exceptions contemplated in the following articles, by the provisions established for the merger in this Act . . .’’. 135 The legal regime for the spin off therefore merely governs certain special features of the spin off process, relating to the contents of the spin off project, the issue of the report, the information that should be provided by independent experts and directors of the companies participating in the transaction and the system of liability of the participating companies. cc) Universal succession

136 The parts into which the net worth of the spun off company is divided should be transferred to the beneficiary companies en bloc and by universal succession. dd) Economic unit

137 In the event of partial spin off, the LSA establishes that the part of the net worth that is divided or segregated should form an economic unit. If the part that is divided or segregated consists of one or more commercial, industrial or service enterprises or establishments, among other effects, the debts acquired for the organization or operation of the transferred enterprise may be attributed to the beneficiary company. The Act does not impose this obligation on the full spin off; however, legal authors are unan-

804

Israel Garca Rico

3. Spin off

Spain

138

imous in this respect: the requirement that the parts into which the net worth of the spinning off company should constitute an economic unit will also apply to the full spin off. ee)

Consideration

Lastly, the LSA establishes the allocation of the assets and liabilities spun off and that 138 have not been distributed in the full spin off project. The assets or their exchange value should be distributed among all the beneficiary companies proportionally to the assets attributed to each one of them in the spin-off project. All the beneficiary companies will be jointly and severally liable for the liabilities that have not been distributed. The consideration for the allocation of the assets and liabilities spun off to the bene- 139 ficiary company or companies, other than in transactions performed between investee companies, will be the delivery or allocation to the shareholders of the company spinning off its assets and liabilities of shares or membership units in the beneficiary company or companies, according to the conversion rate established in the spin-off project. In the case of two or more beneficiary companies, individual consent should be ob- 140 tained from the companies affected to allocate to the shareholders or members of the company spinning off its assets and liabilities shares or membership units in a single one of them. b)

Spin off procedure. Stages of the spin off

aa)

Spin off project

The spin-off project should be drawn up and signed by the directors of the companies 141 participating in the spin off. It should include the statements required for merger pursuant to article 235 of the LSA and those specifically required for the spin off under article 255 of the LSA, which are: (a) Accurate designation and distribution of the assets and liabilities that should be transferred to each of the beneficiary companies. (b) Distribution among the shareholders of the spinning off company of the shares or membership units to which they are entitled in the capital of the beneficiary companies. bb) Reports on the spin off project

The project is subject to a report issued by the directors of the participating companies. 142 It should contain a statement that the reports on contributions in kind contemplated in the LSA have been issued, for each of the beneficiary companies, and it should record the Commercial Registry where the reports are or will be entered. The directors of the participating companies may request the Commercial Registry of the domicile of any one of them to appoint one or more experts to issue a single report on the assets and liabilities in kind that are spun off and on the spin-off project.

Israel Garca Rico

805

143

Spain

VII. Dissolution and Liquidation

143 Additionally, upon the same terms as the merger, the spin-off project is subject to a report on the legal and economic aspects of the spin off, that should particularly state the conversion rate. 144 In clear analogy with the merger, it will not be obligatory to issue these reports where the spin off is made to a 100 % owned subsidiary of the spinning off company and no report will be required when none of the participating companies is an S. A. cc)

Spin-off balance sheet

145 The requirements mentioned above for the merger balance sheet are referred to as regards the preparation and purposes of the spin-off balance sheet. dd) Approval of the spin-off project

146 The provisions of the LSA on the merger apply in respect of this matter also. ee)

Execution in a public instrument

147 The same requirements as those for the merger apply, including the entry at the Commercial Registry and publication in the Official Gazette of the Commercial Registry. ff)

Creditors’ opposition

148 In the spin-off procedure, the creditors of the participating companies have a right of opposition upon the same terms as those discussed for the merger. An additional mechanism for the protection of creditors exists, through a special system of liability of the participating companies. This is established in article 259 of the LSA: ‘‘Should a beneficiary fail to comply with an obligation it has assumed in the spin off, the other beneficiary companies will be jointly and severally liable for compliance with such obligation up to the amount of the net assets attributed to each one of them in the spin off and, should the spinning off company not have been dissolved due to the spin off, the spinning off company will be liable for the full obligation.’’ Additionally, as mentioned above, the beneficiary companies will be jointly and severally liable in the event of full spin off for liabilities that have not been attributed to any beneficiary company.

VII. Dissolution and Liquidation 149 The dissolution and liquidation of the S. A. and of the S. L. are similar procedures that seek final extinguishment of the company in legal trade. This unified procedure is divided into various stages, in which we may find minor formal differences for each corporate form. These stages are set forth below:

1.

Starting of liquidation period

150 The liquidation period starts with the adoption of the resolution to dissolve the company and the appointment of the liquidating body that will thenceforth manage the 806

Israel Garca Rico

2. Dissolution resolution

Spain

151

liquidation operations, replacing the body of directors of the company in its duties. The S. A. will be dissolved in the following events (article 260): (i) by a resolution adopted by the general meeting; (ii) due to expiry of the term established in the articles of association; (iii) due to achievement of its corporate purpose or obvious impossibility to achieve it or deadlock of its bodies of governance, rendering its operation impossible; (iv) due to losses reducing the company’s equity to less than its the capital stock, unless capital is increased or reduced in the necessary amount; (vi) merger or spin off of the company; and (vii) any other events established in the articles of association. These events apply to the S. L. under article 104 of the LSRL, which includes failure to perform the business making up the corporate purpose as a specific event of dissolution and excludes the merger or spin off of the company.

2.

Dissolution resolution

The resolution to dissolve the company (which should be executed in a public deed and 151 entered at the Commercial Registry) implies the commencement of the liquidation period of the company, for which an initial liquidation balance sheet will be drawn up, that has to be approved by the general meeting simultaneously with the dissolution.

3.

Liquidation period. Liquidating body

Upon commencement of the liquidation period, the liquidating body will start to 152 discharge its duties, consisting mainly of managing the transactions to cancel outstanding liabilities of the company and to realize its assets (credits, real properties, etc.). During that period, the company may continue performing its business and therefore continues in existence although its activity will be affected by the fact that the company is close to its extinguishment, so that, for this to be made public, the company should add the statement “en liquidacin” (under liquidation) to its name.

4.

End of liquidation period

Upon conclusion of the liquidation transactions, a final balance sheet will be drawn up 153 by the liquidating body. Ideally, this final balance sheet should only record cash and banks although it frequently includes other unrealized assets or outstanding liabilities that should be assumed by the shareholders /members of the company in liquidation. In this respect, the general meeting of the company should approve, with the majority 154 stated in the above sections, the balance sheet simultaneously with the decisions made on the distribution of the assets resulting from liquidation. The company disappears from legal trade upon the distribution of assets after liquidation, once the public deed of liquidation of the company has been executed. It should be noted in this respect that, although it is customary for the corporate assets resulting from liquidation to be distributed in cash, they may be allocated in kind, provided among other requirements, that this is accepted by each shareholder or member recipient of the asset. Israel Garca Rico

807

155

Spain

VII. Dissolution and Liquidation

155 In the case of the S. L., an express approval of the report issued by the liquidating body on the liquidation transactions should be attached to the approval of the final liquidation balance sheet and of the distribution of the assets resulting from liquidation.

5.

Final liquidation balance sheet

156 The final liquidation balance sheet of the S. A. is published in the Official Gazette of the Commercial Registry and in a newspaper of wide circulation in the province where the company has its registered office. The purpose of this is to open the 40-day period for opposition (this is the theory generally held by legal authors), in which the shareholders that consider that the allocation of the assets resulting from liquidation or other aspects of the liquidation were to their detriment may oppose the balance sheet. In the case of the S. L., no provision requires this balance sheet to be published, although the opposition period has a duration of two months (in contrast with the 40-day period applicable in the S. A.).

6.

Liquidation public deed and registration

157 After the term for opposition has expired, the liquidating body will execute the public deed of liquidation and will request the Commercial Registry to cancel the registered entries of the dissolved company, which will then be finally extinguished. As a general rule, the corporate books should be deposited at the Commercial Registry when the liquidation of the company is filed for entry.

808

Israel Garca Rico

Switzerland Adrian Drig

Table of Contents I.

Introduction

1. Sources of corporate law 2. Types of corporate business organization a) Stock corporation and limited liability company b) Other types of corporate business organization aa) General partnership bb) Limited partnership cc) Simple partnership dd) Stock corporation with general partners ee) Cooperative ff) Branch 3. Commercial register a) Organization b) Information filed c) Commercial register extract

II. Stock corporation 1. 2. a) b)

c) d) e)

f) g) h) i)

Character and advantages as compared to the limited liability company Formation Formation procedure Registration procedure and post formation actions aa) Registration procedure bb) Post formation actions Approval requirements Shelf stock corporation Costs and duration aa) Costs bb) Duration Pre-formation status Stationery Corporate name Business year

Adrian Drig

813 813 814 814 815 815 815 815 816 816 816 816 816 816 817 818 818 818 818 820 820 822 822 823 823 823 824 824 824 825 825

3. Shareholders a) Rights and duties of a shareholder aa) Economic rights (1) General (2) Dividend right (3) Agio (4) Interim dividend bb) Membership rights cc) Information rights dd) Further protective rights ee) Shareholders with qualified participations ff) Duties b) Shareholders’ meeting aa) Powers bb) Calling cc) Meeting dd) Exercise of membership rights c) Shareholder resolutions d) Shareholder exclusion 4. Shares a) Classes of shares aa) Common shares bb) Voting shares cc) Preference shares dd) Participation certificates ee) Profit-sharing certificates b) Transfer of shares c) A stock corporation’s own shares 5. Articles of incorporation a) Mandatory content aa) Provisions required by law bb) Additonal provisions b) Amendment of the articles of incorporation c) Capital increase and reduction

826 826 826 826 826 827 827 828 828 829 829 830 830 830 831 831 832 832 834 834 834 834 835 835 835 835 835 836 837 837 837 837 838 838

809

Switzerland

6. a)

b)

c) 7. a) b) c) d) 8. a) b) c) 9. a) b) c) d) e) f) g) h) 10. a) b) c) d) e)

810

aa) Capital increase bb) Capital reduction Board of directors Directors aa) Election and dismissal bb) Eligibility and composition cc) Powers and duties dd) Meetings and disclosure of practice ee) Compensation Management and representation aa) Duty of care and loyalty bb) Delegation of management cc) Representation No supervisory board/no workers council Corporate Governance Definition Law SWX Directive Swiss Code of Best Practice Selected liability and capitalization questions Director’s liability Debt-equity ratio Capital loss, over-indebtedness, and postponement of bankruptcy Accounting Bookkeeping Accounting principles Annual financial statements Disclosure of financial statements Consolidation Audit requirements Setting up of reserves New federal law on admission and supervision of auditors Taxation Direct taxation of companies and branches Direct taxation of individuals Tax exemption and relief Tax incentives Indirect taxes aa) Federal value added tax bb) Federal withholding tax cc) Federal stamp duty

Table of Contents 838 839 839 839 839 839 841 842 842 842 842 843 843 844 844 844 844 845 845 846 846 847 848 849 849 850 851 851 852 853 854

11. Dissolution and liquidation 12. Insolvency, debt enforcement, moratorium, and bankruptcy a) Insolvency b) Debt enforcement c) Moratorium d) Bankruptcy 13. New Merger Law and Swiss merger control scheme a) New Federal Law on Merger, Demerger, Transformation and Transfer of Assets b) Swiss merger control scheme 14. List of publications a) On stock corporation only b) On both stock corporation and limited liability company

III. Limited liability company 1. 2. a) b) c) d) e)

f) g) h) i) 3. a)

854 855 855 856 857 858 858 858 858 859

b)

c) d)

859 861 861 862 863 863 865

865 866 867 867 867 868

Character and advantages as compared to the stock corporation Formation Formation procedure Registration procedure Approval requirements Shelf limited liability company Costs and duration aa) Costs bb) Duration Pre-formation status Stationery Corporate name Business year Partners Rights and duties of a partner aa) Economic rights bb) Membership rights cc) Control rights dd) Right and duty to manage and represent ee) Duties Partners’ meeting aa) Powers bb) Calling Partner resolutions Partner exclusion

868 869 869 869 870 870 871 871 871 871 871 871 872 872 872 872 872 872 873 873 873 873 874 874 875

Adrian Drig

Index 4. a) b) c) 5. a)

b) c)

6. a)

b)

7. a)

Quotas Classes of quotas Transfer of quotas A limited liability company’s own quotas Articles of incorporation Mandatory content aa) Provisions required by law bb) Additional provisions Amendment of the articles of incorporation Capital increase and reduction aa) Capital increase bb) Capital reduction Management Managing directors aa) General bb) Eligibility cc) Powers and duties Management and representation aa) Duty of care and loyalty bb) Delegation of management cc) Representation Selected liability and capitalization questions Partners’ and managing directors’ liability aa) Partners’ liability bb) Managing directors’ liability

Switzerland 875 875 876 876 876 876 876 877 877 878 878 878 878 878 878 879 879 879 879 880 880

b) Debt-equity ratio c) Capital loss, over-indebtedness, and postponement of bankruptcy 8. Accounting a) Bookkeeping b) Accounting principles c) Annual financial statements d) Disclosure of financial statements e) Consolidation f) Audit requirements g) Setting up of reserves 9. Taxation 10. Dissolution and liquidation 11. Insolvency, debt enforcement, moratorium, and bankruptcy 12. Proposed amendment to the provisions on the limited liability company 13. List of publications a) On limited liability company only b) On both limited liability company and stock corporation

IV. Branches 1.

880 2. 880 880 881

3.

Character of branches and branches as compared to subsidiaries Establishment of a Swiss branch of a foreign company Closure of branches

881 881 881 881 882 882 882 882 882 883 883 883 884 884 885 885 886 886 886 887 889

Index Advantages of a branch 355 limited liability company 249 stock corporation 21 subsidiary 356 “Agio” 55-56, 186 Annual report 64, 76-77, 79, 91, 170, 172, 332 Arm’s length principle 199, 356 Audit ordinary 191 limited 192 Audit committee 144 Auditors 15, 20, 26-31, 58, 61, 67, 74, 76-79,

Adrian Drig

91, 115, 121, 164, 169, 173-174, 178, 182-185, 189-190, 192-193, 199, 216, 220, 223-224, 246, 249, 261, 273, 278, 298, 328, 331, 335, 338, 346, 358 Auditors’ report 16, 64, 79, 173, 178, 184, 223 Bank 24, 26, 30, 33, 38, 86, 88, 106, 108, 124, 129, 143, 148, 151, 176, 183, 209, 211, 242 Bankruptcy proceedings 221, 230, 233-236, 344 Bearer shares 86, 99-100, 106, 115 Board structure 20, 148 Books of account 166, 329 Cantonal law 2, 38 “Check-the box”-regulation 340

811

Switzerland

List of Abbreviations

Circular letter 282, 284-285, 298 Citizenship requirement 23, 125, 311 Compensation committee 144 Contribution in kind 116, 299 “de facto organs” 159 Dividend right 50-52, 56, 58-61, 101, 186, 204 Employee representation 126, 148-149 Escape clause 109 Federal law 2 Fiduciary clause 109-110 Finance branch 353 Financial statements 16, 56, 58, 61, 64, 76-77, 79, 83, 91, 152, 162, 167, 169-175, 177-180, 184, 190-191, 199, 332-334 Founders 22, 24-31, 35, 43-44, 67, 115-116 Hague Convention 22, 30, 358 Hidden reserves 163, 169 Identification number 17 Interim dividend 58-61 Lex Friedrich declaration 30 Loss of capital 162-165, 248 Majority absolute 285 ordinary 91 qualified 90 Meeting without observing the formal requirements 81, 283 Merger control 237-243 Monistic system 20 Moratorium 226-227, 231-232, 344 Nomination committee 144 Non-competition undertaking 298, 315 Notice of the meeting 79, 282

Organizational regulations 35, 143, 145, 151, 318 Over-indebtedness 131, 163-164, 227, 327-328 Percentage limit 62, 110, 177 “Per-se corporation” 340 Procuration 279, 298 Proxy 80, 85, 115 Publication 31, 80, 121, 175, 217, 227, 231 Registered shares 31, 87, 90, 99-100, 107, 109-110, 112, 115, 210 Reserves 25, 52-53, 55, 57-58, 111, 162, 169, 181, 186-188, 197, 339 Residence requirement 23, 125 Secretary 30, 84, 358 Share capital limitation 25, 247, 346 Share certificates 30, 100, 106, 292 Shareholders’ meeting annual 79, 83, 134, 173, 182 extraordinary 162, 214, 223 Share register 87, 107 Signatory 15, 29-30, 354 Special audit 65 Special auditors 65, 69, 71, 246, 273, 278, 298, 328, 331, 338, 346 Squeeze out 97, 240 Stampa declaration 30 Subscription right 50, 120 Swiss Official Gazette of Commerce 19, 31, 121, 175-176, 217, 222, 227, 257 Transfer restriction of shares 15, 31, 90, 99, 109-110, 112, 142, 210 Treasury stock 111-113, 210, 296 Universal meeting 81

List of Abbreviations AJP

Art. BankL BankO BGE CC CDEB

cf. CHF

812

Aktuelle Juristische Praxis Article Federal Law on Banks and Savings Banks Federal Ordinance on Banks and Savings Banks Decision of the Swiss Federal Supreme Court Swiss Civil Code Swiss Code of Debt Enforcement and Bankruptcy confer Swiss francs

Adrian Drig

1. Sources of corporate law CO CRO EFTA

e.g. EU FBC FCC FER FOCR

Hague Convention IAS

i.e. IFRS

Merger Law OECD

para. NZZ RIW

s. SESTL SOGC

subpara. SWX US GAAP

1

Switzerland

Swiss Code of Obligations Commercial Register Ordinance European Free Trade Association exempli gratia (for example) European Union Federal Banking Commission Federal Competition Commission Recommendations on Financial Accounting and Reporting Federal Office for the Commercial Register Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents dated October 5, 1961 International Accounting Standards id est (that is) International Financial Reporting Standards Federal Law on Merger, Demerger, Transformation and Transfer of Assets Organization for Economic Co-operation and Development paragraph Neue Zrcher Zeitung Recht der Internationalen Wirtschaft sequitur Federal Law on Stock Exchanges and Securities Trading Swiss Official Gazette of Commerce subparagraph Swiss Stock Exchange United States Generally Accepted Accounting Principles

I.

Introduction*

1.

Sources of corporate law

Swiss law is codified as is typical for continental European countries. However, Switzer- 1 land is not a member of the European Union (EU). Therefore, EU law, in particular the EU directives in the field of corporate law, are not applicable to business organizations incorporated in Switzerland. Notwithstanding the foregoing, the Swiss legislator is closely following the developments of EU law. Swiss corporate law is federal law and, as such, takes precedence over cantonal law.1 2

* 1

This chapter on Switzerland was finalized in October 2004. Switzerland consists of 26 Cantons that are granted a certain degree of autonomy by the federal constitution. As is the case for the Swiss Confederation, the Cantons have a republican form of government with separate legislative, executive, and judicial branches.

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813

3

Switzerland

I. Introduction

3 Corporate law is based upon the Swiss Code of Obligations (CO) set out in volume five of the Swiss Civil Code (CC).2 Influenced by the French Napoleonic Code and German law, the CO governs the legal matters not only relating to corporate forms of business organization but also to, inter alia, contracts and torts. The CO was enacted in 1881, adapted in 1912, and substantially revised in 1938 as were the stock corporation law provisions in 1992. 4 Statutory law is Switzerland’s primary source of law. It is, however, often expressed in very general and imprecise terms. Accordingly, the courts in Switzerland must give it content and apply it to the individual case. Case law is, therefore, the second most important source of law. When both a statutory provision and a rule in (customary) case law3 are missing, the court must make its decision as if it were acting as legislator.4 Although judicial precedents are not binding, they can have important practical relevance and may be followed, specifically if they originate from the Swiss Federal Supreme Court in Lausanne. The writings and commentaries of learned authors, i. e., the legal doctrine, is to be considered as the fourth source of Swiss law.

2.

Types of corporate business organization

a)

Stock corporation and limited liability company

5 The two main types of Swiss companies are the stock corporation (Aktiengesellschaft (AG), Socie´te´ anonyme (SA), Societa` anonima (SA))5 and the limited liability company (Gesellschaft mit beschra¨nkter Haftung (GmbH), Socie´te´ a` responsabilite´ limite´e (Sa`rl), Societa` a garanzia limitata (Sagl)).6 6 At the end of 2003, there were 174,370 stock corporations and 68,633 limited liability companies registered in Switzerland.7 Hence, the majority of the forms of corporate business organization in Switzerland are organized as stock corporations. It is the only type of corporate business organization suitable for large and publicly held companies since it may issue stock in the form of negotiable instruments allowing for stock exchange listing. Historically, the limited liability company never played an important role in Switzerland. However, following the amendment of the stock corporation provisions of 2

3 4 5 6 7

814

The CC comprises the following subject matters: persons, family, inheritance, and property. It was enacted in 1912. Customary law has little practical importance in Switzerland. Art. 1 para. 3 CC. See Section II below. See Section III below. Swiss Official Gazette of Commerce (SOGC), No. 22, February 3, 2004. According to the Federal Office for Statistics, 10,200 business enterprises were newly established in 2003, mostly small enterprises in the services sector. 96% of all new business establishments employ up to four employees. In 41% of the cases, the sole proprietorship (Einzelfirma, raison individuelle, ditta), in 35%, the limited liability company, and in 19%, the stock corporation were chosen as the legal entities. Neue Zrcher Zeitung (NZZ), No. 148, June 29, 2004, 21.

Adrian Drig

2. Types of corporate business organization

Switzerland

7

the CO in 1992 (by which, inter alia, the minimal share capital of a stock corporation was increased to CHF 100,000), this type of legal entity became more important.8 b)

Other types of corporate business organization

The following other types of corporate9 business organization10 are to be found in 7 Switzerland: aa) General partnership

A general partnership (Kollektivgesellschaft, Socie´te´ en nom collectif, Societa` in nome col- 8 lettivo)11 is made up of two or more individuals (not companies). All partners have personal, joint, and unlimited liability for all debts of the partnership. They are generally bound by the acts of the other partners. bb) Limited partnership

A limited partnership (Kommanditgesellschaft, Socie´te´ en commandite, Societa` in accom- 9 andita)12 has two classes of partners, one or more general partners (individuals only), and one or more limited partners (individuals and/or companies). The liability of the general partner is the same as that of the partners in a general partnership. The limited partner’s liability is limited to his capital contribution as stated in the partnership agreement and registered in the commercial register. cc)

Simple partnership

A simple partnership (Einfache Gesellschaft, Socie´te´ simple, Societa` semplice) is a contrac- 10 tual relationship between two or more persons (individuals and/or companies). It is the least structured type of corporate business organization under Swiss law. The simple partnership may not operate under a registered company name. Every partner is personally liable. 8

9

10

11

12

In 1993, there were 171,323 stock corporations and only 4,186 limited liability companies registered in Switzerland. See Jrgen Wagner/Adrian Plss, Entwicklungen im schweizerischen Gesellschafts- und Steuerrecht, RIW 6/2004, 416-427, 418. As opposed to the sole proprietorship, where the business is carried out by one individual and hence cannot be deemed to constitute a corporate form of business organization. At the end of 2003, there were 147,311 sole proprietorships registered in Switzerland. See SOGC, No. 22, February 3, 2004. According to the new draft Federal Law on Collective Capital Investments, the investment company with variable capital – following the pattern of the Luxembourg “socit d’investissement capital variable” (SICAV) – will be introduced into Swiss law. This new type of legal entity will, essentially, be based on stock corporation law, adapted by the draft law to the needs of an investment scheme. The second new type of legal entity to be introduced by the draft law is the limited partnership for collective capital investments, which follows the pattern of the Anglo-Saxon partnership. At the end of 2003, there were 15,455 general partnerships registered in Switzerland. See SOGC, No. 22, February 3, 2004. At the end of 2003, there were 2,727 limited partnerships registered in Switzerland. See SOGC, No. 22, February 3, 2004.

Adrian Drig

815

11

Switzerland

I. Introduction

dd) Stock corporation with general partners

11 A stock corporation with general partners (Kommanditaktiengesellschaft, Socie´te´ en commandite par actions, Societa` in accomandita per azioni) combines elements of a stock corporation and a partnership. It consists of shareholders, whose position is similar to that of the shareholders of a stock corporation, and of one or more partners who have, as in a partnership, unlimited liability for the company’s debts. ee)

Cooperative

12 A cooperative (Genossenschaft, Socie´te´ coope´rative, Societa` cooperativa) is a union of at least seven persons (individuals and/or companies).13 Its main purpose is to promote and secure the economic interests of its members by mutual assistance. A cooperative is primarily liable for its own debts with its own capital. In addition, the articles of incorporation may stipulate that its members are personally liable for a limited or even an unlimited amount of the company’s debts. ff)

Branch

13 In addition, there are branches (Zweigniederlassung, succursale) of foreign or domestic companies.14

3.

Commercial register

a)

Organization

14 The commercial register is a public register administered by the government. It contains key information on legal entities engaging in economic activity. Switzerland’s commercial registers are organized under the 26 Cantons, each responsible for maintaining their commercial register. The Federal Government exercises oversight over them, ensuring uniformity. Each Canton is required to have at least one registry. Currently, 44 cantonal commercial registries exist in Switzerland. b)

Information filed

15 A Swiss business entity is required to file, and continuously update, certain key information with the competent commercial registry where it has its registered office.15 As regards a stock corporation, this information includes the following: – name; – registered office; 13

14

15

816

At the end of 2003, there were 12,529 cooperatives registered in Switzerland. See SOGC, No. 22, February 3, 2004. At the end of 2003, there were 3,371 branches of foreign and 9,418 branches of domestic companies registered in Switzerland. See SOGC, No. 22, February 3, 2004. See Section IV below. Many business entities, including the stock corporation and the limited liability company, come into existence only when entered into the commercial register. See II.2.b) and III.2.b) below.

Adrian Drig

3. Commercial register

Switzerland

16

– – – – –

legal form; date of incorporation; statutory purpose; total amount of capital (plus authorized and/or contingent share capital); number, nominal value, and types of shares, and whether such shares are subject to a transfer restriction; – members of the board of directors and other signatories (with their name, domicile, and place of origin (Swiss citizens) or citizenship (non-Swiss citizens); and – name of the auditors and their registered office. Financial statements and audit reports, however, need not be filed. Also, the identity of 16 the shareholders of a stock corporation is not recorded in the commercial register. Each business entity registered in the commercial register is assigned an identification 17 number, the structure of which follows international standards and is made up as follows: CH-XXX. X.XXX.XXX.-X.16 c)

Commercial register extract

Without question, anyone may obtain a commercial register extract regarding a regis- 18 tered business entity from the competent commercial registry, in hardcopy form (uncertified or certified) or in electronic form (uncertified), which establishes a Swiss entity’s due formation and existence.17 The costs for a certified commercial register extract, generally available within one to five working days, range roughly from CHF 25 to CHF 60, depending on the specific commercial registry. The content of the commercial register is public. Third parties, therefore, cannot claim 19 ignorance to a particular piece of information registered in the commercial register.18 The entries and changes in the commercial register are published in the Swiss Official Gazette of Commerce (SOGC).19

16 17

18

19

See Adrian Drig, Zur Identifikationsnummer gemss Art. 936a OR, in: AJP 4/2004, 405-410. Switzerland does not recognize the legal concept of good standing. A certified commercial register extract may be ordered, depending on the Canton, over the internet, by telefax, or by letter. In some Cantons, an order over the telephone is possible. Some Cantons provide the possibility of obtaining online a non-certified commercial register extract. The Federal Office of Justice maintains a central business names index on the internet for the purpose of accessing the companies recorded in the cantonal databases (www.zefix.admin.ch). E. g., the information that a particular individual is a director of a company but has no authority to sign on behalf of that company. The SOGC is published five times a week. Its database is also available on the internet (www.sogc.ch).

Adrian Drig

817

20

Switzerland

II. Stock corporation

II. Stock corporation 1.

Character and advantages as compared to the limited liability company

20 Swiss stock corporation law provides, in essence, for a monistic system, i. e., the same rules apply to both small enterprises and large companies. Regardless of a company’s size, a few distinctions are, however, made for listed companies as opposed to non-listed companies.20 The shareholders’ liability is limited to the nominal capital invested in the stock corporation. The stock corporation has a one-tier board structure21 with auditors as mandatory. 21 As compared to the limited liability company,22 the stock corporation’s advantages are, in essence, the following: – The maximum share capital is not limited. This renders a stock corporation more suitable for larger business operations. – As a rule, the shares of a stock corporation may be more easily transferred than quotas in limited liability companies. This makes a stock corporation the only appropriate form if the shares are to be listed on a stock exchange or if going public is intended. 23 – As opposed to the partners of a limited liability company, the identity of shareholders in a stock corporation is not registered in the commercial register and, therefore, need not be publicly disclosed. – The articles of incorporation of a limited liability company may confer additional obligations on the partners whereas the duties of shareholders in a stock corporation are limited to paying in the nominal value of the subscribed shares. – The corporate organization is more detailed, thus making a stock corporation more appropriate for larger business operations.

2.

Formation

a)

Formation procedure

22 The formation meeting is held in the presence of at least three founders (and initial shareholders), individuals and/or entities, of the stock corporation24 who either appear in person before the notary, or are represented by proxies so that their presence in Switzerland is not required. The founders’ proxies must be notarized. If notarized outside 20

21 22 23 24

818

E. g., as regards registered share transfer restrictions or the requirement to publish financial statements. See Section II.4.b) and Section II.9.d) below. See, however, Section II.6.c) below. See Section III below. Only stock corporations are eligible for listing on the Swiss Exchange (SWX). When a wholly owned subsidiary is formed, the three founders usually consist of the actual shareholder holding ultimately all shares and two members of the board of directors who

Adrian Drig

2. Formation

Switzerland

23

Switzerland, it must be accompanied by an apostille pursuant to the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents dated October 5, 1961 (Hague Convention), or super-legalized by a certification of a Swiss embassy or consulate on the non-Swiss notary’s capacity. The notarization of proxies of a company must include the confirmation that the executing officers are, in fact, officers of the company. The existence of a company must further be evidenced by an updated extract from the commercial register or, in case of companies incorporated outside of Switzerland, an equivalent document showing the company’s actual existence. In general, the shareholders of a Swiss stock corporation do not need to be either Swiss 23 residents or Swiss citizens or Swiss companies,25 nor do they need to have special qualifications. For a stock corporation’s formation by way of contribution in cash, the founders declare 24 in the notarized deed that the founders have subscribed to all shares, and that they have made their contributions to the share capital, i. e., minimum payments have been made. The amount must be paid into a blocked account of a Swiss bank prior to the founders’ meeting (or the shareholders’ meeting in the event of a capital increase). 26 The minimum nominal share capital of a stock corporation is CHF 100,000. 27 Upon 25 formation (or a subsequent capital increase), the share capital must be fully subscribed, but not necessarily paid in full. The founders (or the shareholders’ meeting in the event of a capital increase) may elect to pay in as little as 20 % of the nominal capital on or before the date of formation (or subsequently at the occasion of any capital increase) but, in no event, less than CHF 50,000. The founders (or the shareholders’ meeting in the event of a capital increase) may also elect to pay the shares in full, or to issue shares at a premium over their nominal value. If shares are issued at a premium, the amount of the capital surplus is booked in the general reserves of the stock corporation. 28 In the founders’ meeting, the founders adopt the articles of incorporation of the stock 26 corporation and elect the members of the initial board of directors as well as the auditors. The notary records the resolutions in a public deed certifying that all docu-

25

26

27

28

subscribe for one share each on a fiduciary basis. In order to evidence the fiduciary nature of the share subscription by the two additional shareholders, it may be appropriate to enter into a mandate agreement. Immediately following the formation, the two additional founders will assign their shares to the main shareholder. This assignment is usually made before issuing share certificates. If the share certificates are issued after this transfer, one share certificate can be issued for all shares of the company. In very few areas only (e. g., the operation of a vessel flying a Swiss flag), special provisions require a majority of Swiss citizens as shareholders. The bank must certify that the amount required was paid in and is at the free disposal of the stock corporation. Other than the minimum capital requirement, Swiss corporate law does not prescribe any capital adequacy requirements. See, however, Section II.8.b) below. See Section II.3.a)a) (Agio) below.

Adrian Drig

819

27

Switzerland

II. Stock corporation

ments for the formation (such as the share subscription forms, the bank confirmation, and the articles of incorporation) were submitted to him and to the founders. 27 No special founders’ report as to the contribution and no auditors report certifying the founders’ report is required if the capital is contributed in cash. The founders are, however, required to render a written report on the following categories of non-cash contributions or acquisitions: – contributions to the share capital are made in kind by contributing assets other than cash; – the subscribed share capital is paid in by setting off claims of a shareholder against the stock corporation; – the stock corporation intends, following its formation, to acquire assets with the subscription proceeds; and – special benefits are conferred on the founders or on other persons. 28 The founders’ report must be reviewed by auditors who certify in writing that the report is complete and accurate, and must provide information on: – the type and condition of the assets to be contributed, or to be acquired, and the reasonableness of the valuation of these assets; – the existence of a debt that may be set off; or – the reasons for special rights in favour of founders or other persons and the appropriateness of these benefits. 29 All board members and the auditors must declare in writing that they accept their election. After the founders’ meeting, a meeting of the board of directors is held to set up the board’s organization and to designate authorized signatories. b)

Registration procedure and post formation actions

aa)

Registration procedure

30 Following the founders’ meeting, an application for registration must be filed with the commercial registry where the stock corporation is to be registered. The application comprises all the essential information with respect to the stock corporation. It must be signed by the chairman or the vice-chairman and the secretary or a second member of the newly constituted board of directors. The registration application must be accompanied by the following supporting documents (in the case of a formation by cash contribution):29 – the public formation deed, in the original or as a notarized copy; – a notarized copy of the articles of incorporation; – declarations of the initial board members’ acceptance; – declarations of the initial auditors’ acceptance; 29

820

All these documents become available for public inspection. All documents filed with the commercial registry in a, for example, German speaking Canton, which are not in the German language, need to be accompanied by a German translation by a qualified translator who is required to confirm, by publicly notarized signature, that he has drafted this translation in good faith.

Adrian Drig

2. Formation

Switzerland

31

– a statement of a Swiss bank, confirming that the initial share capital has been deposited in cash on a blocked account of the stock corporation; – minutes of the board of directors’ meeting at which the board was constituted and authorized signatories of the stock corporation were designated;30 – notarized corporate signature documents;31 – a declaration concerning the stock corporation’s domicile, i. e., whether it disposes of its own offices at the address to be registered, if not, a domicile holder’s written declaration guaranteeing the domicile of the stock corporation at the domicile holder’s address; and – other declarations relating to contributions to the share capital (so-called stampa declaration) as well as to Swiss or foreign beneficial ownership of the stock corporation (so-called Lex Friedrich declaration). 32 Upon the registration, i. e., entry of the stock corporation in the commercial register, 31 the stock corporation is deemed validly incorporated and duly existing as a legal entity. The registration is evident by a commercial register extract regarding the stock corporation. Notice of the stock corporation’s registration is published in the SOGC. The date of publication is, however, not relevant for the date on which the stock corporation is said to exist. The published information on the newly formed stock corporation includes: – the date of the founders’ meeting; – the corporate name and domicile; – the purpose and duration; – the amount of the share capital and the amount paid in; 30

31

32

The minutes must not be recorded in a public deed. They can be submitted as a full set of or an extract from the minutes, bearing the original hand-written signatures of the chairman and the secretary, or in the form of circular resolutions, bearing the original hand-written signatures of all the members of the board of directors. All individuals authorized to sign on behalf of the stock corporation, i. e., those members of the board – and, if appointed, those officers – who have signatory power for the stock corporation must either sign the commercial register application or submit separate specimen signature sheets. The signatures of all these individuals must be notarized and, if notarized outside Switzerland, be accompanied by an apostille under the Hague Convention or be superlegalized by a Swiss embassy or consulate certifying the capacity of the foreign notary. The notarization of the company signature requires declaring the first and last name, the year of birth, any academic titles, the citizenship (in case of a Swiss citizen, the place of origin), and the place of residence (political municipality). Further, an identification document recognized by civil status legislation, such as a passport, an identity card, or an alien’s residence permit, is required. The so-called stampa declaration requires the founders to confirm that no other contributions in kind and acquisitions of assets exist, no other settlements remain outstanding and no other special benefits exist, other than those indicated in the founding documents (Art. 78 para. 1 lit. g CRO). The so-called Lex Friedrich declaration serves to answer the question as to whether a company is to be referred to the licensing office under Art. 18 para. 1 and 2 of the Federal Law governing the Acquisition of Real Estate by Persons Resident Abroad.

Adrian Drig

821

32

Switzerland

II. Stock corporation

– the contributions in kind or other property received in payment of the shares, if any; – the special benefits granted to the founders, if any; – the type and par value of the shares as well as transfer restrictions for registered shares, if any; – the names, domicile, and citizenship of the board members and officers; – the name and domicile of the auditors; and – the manner in which official announcements are to be made. bb) Post formation actions

32 Following a stock corporation’s due registration in the commercial register, several tasks are to be discharged. 33 The commercial register extract must be presented to the Swiss bank in which the paid-in capital has been deposited in cash. Upon presentation of this extract, the bank will release the paid-in capital from the blocked account and transfer it to a regular current account of the newly existing stock corporation from which withdrawals can then be made. 34 Share certificates may be issued only following the stock corporation’s due registration in the commercial register; certificates issued before this date are null. 33 35 The board of directors may now issue the organizational regulations that govern the stock corporation’s management, that designate the necessary bodies and individuals, that describe their duties and responsibilities, and that provide for the reporting. 34 This may be done as early as immediately following the founders’ meeting when the board of directors resolves its constituent parts. 36 Further, a stock corporation is well advised to register with the Federal Tax Administration for value added tax promptly upon its due registration in the commercial register so that initial expenditures relating to business may be recovered.35 37 Any stock corporation employees must be registered with the competent social security agency and insured as required by law. c)

Approval requirements

38 In general, no license is required to do business in Switzerland. However, federal and cantonal law impose license or permit requirements for certain types of businesses and for some professions. Such requirements apply, inter alia, for the following: – banks; – securities dealers; – insurance companies; – businesses for which a public concession is required (e. g., the operation of a railroad or a casino); 33 34 35

822

See also footnote 24 above. See Section II.6.b)bb) below. See Section II.10.e)aa) below.

Adrian Drig

2. Formation

Switzerland

39

– hotels and restaurants (only in certain Cantons); – certain mercantile and services businesses (e. g., wine merchants, private employment agencies, temporary employment services); – physicians, dentists, and pharmacists; and – attorneys and private notaries (only existing in certain Cantons). Indirectly, additional approval requirements apply to employers employing non-Swiss 39 individuals who need a work and a residence permit.36 d)

Shelf stock corporation

The reservation of a corporate name (shelf registration) is not possible. When a cor- 40 porate name for a stock corporation would like to be blocked for its own purposes, the only way to do this is through the incorporation of the stock corporation which is, however, done relatively quickly and not at a prohibitive cost. 37 e)

Costs and duration

aa)

Costs

The formation costs for a standard stock corporation formed by way of a simple cash 41 contribution include the following: – 1% of the entire consideration paid or contributed to the stock corporation’s equity in relation to the formation whereby the first CHF 250,00038 is exempt on account of the federal stamp duty;39 36

37 38

39

Any non-Swiss citizen who wishes to pursue gainful employment and to reside in Switzerland must obtain a work and residence permit. For foreign nationals, who are not self-employed, the Swiss employer must request the work and residence permit. It will normally be granted for EU nationals and for non-EU citizens who are well qualified, such as specialists. Foreigners who invest in Switzerland and wish to manage a business, or managers of foreign companies, generally are granted these permits, especially when high-value jobs are created. The procedures to be followed and the required permit depend on whether the individuals are EU nationals or citizens of a country outside the EU. For EU nationals, free movement of individuals and, consequently, the same treatment as for Swiss citizens, is implemented within the framework of the bilateral agreements between the EU and Switzerland through a gradual opening of the labor market. In three phases extending over 12 years, the transition to the free movement of individuals according to EU law will be achieved. In all cases, the permit will be issued by the Canton. Annual permit holders may have their family join them; in this case, a work permit is issued also to the spouse. A work permit may be obtained even if the residence of the two spouses is not the same. A spouse may take up residence in a different Canton. See Section II.2.e) below. In August 2004, the Federal Council proposed increasing the exemption limit from CHF 250,000 to CHF 1,000,000 within the course of the amendment of the Federal Stamp Duty Law. Following its incorporation, the stock corporation must pay a one-time federal stamp duty. This initial stamp duty is assessed at the rate of 1% of the entire consideration paid or

Adrian Drig

823

42

Switzerland

II. Stock corporation

– fees of the notary for notarisation and the commercial registry for registration of approximately CHF 2,000; and – consulting and attorneys’ fees of approximately CHF 2,000 to CHF 5,000. 42 The annual costs of compliance with Swiss law for a stock corporation depend on the circumstances. When compared with other jurisdictions, these costs are relatively low. bb) Duration

43 The entire registration process normally takes approximately two to three weeks from the date of the founders’ meeting. It may be shortened to two to four business days upon consultation with the competent commercial registry. The entire process, from the preliminary search of the corporate name of the stock corporation to be newly established until its due registration in the commercial register, regularly takes two to four weeks.40 f)

Pre-formation status

44 The provisions in the CO regarding the simple partnership are applied to the stock corporation in its formation phase. Here, the founders can act on behalf of the stock corporation and validly enter into obligations for it. They are, however, personally, jointly, and severally liable for any acts they perform in the name of the stock corporation during this formation phase, i. e., until the stock corporation’s due registration in the commercial register. The registered stock corporation assumes all liabilities undertaken in its name during the formation period either implicitly or explicitly by the board of directors, thereby releasing the individuals acting on behalf of the stock corporation from their liability within three months of the stock corporation’s entry into the commercial register. g)

Stationery

45 In contrast to EU law, Swiss corporate law has no special requirements regarding the stationery used by a stock corporation. In particular, there is no requirement to include on its letterhead or any other business correspondence the stock corporation’s corporate name,41 its legal form, its registered seat, the competent commercial register, or the

40

41

824

contributed to the stock corporation’s equity. If shares are issued at a premium, the 1% stamp duty is due on the nominal capital plus the premium. See Section II.10.e)cc) below. The main steps for establishing a new stock corporation are the following: preliminary search of corporate name, drafting of documentation (including articles of incorporation), payment of share capital, formation meeting before notary, filing of formation deed (plus supporting documents) with commercial registry, due registration in the commercial register and publication in the SOGC. See, however, Section II.2.h) below.

Adrian Drig

2. Formation

Switzerland

46

register (identification) number.42, 43 However, when the stock corporation’s corporate name and/or any other information is put on its stationery, facsimile cover sheets, invoices, and similar documents, they must be true and not misleading. Specifically, the stock corporation is required by law to note its VAT registration number on its invoices. h)

Corporate name

The corporate name of a stock corporation may be chosen freely, provided that it does 46 not conflict with an existing corporate name, is not misleading, and does not serve only for advertising purposes. References in the corporate name to any geographical areas are allowed if they correctly reflect the stock corporation’s area of activity. Two business enterprises operating in the same relevant area must not have the same corporate name. For stock corporations, the relevant area is the territory of Switzerland. At any rate, it is advisable to submit the intended corporate name to the Federal Office 47 for the Commercial Register (FOCR) and the competent cantonal commercial registries for approval before incorporation. This approval can usually be obtained in less than a week. If the name of the stock corporation includes invented terms, the stock corporation is not required to utilise the abbreviation Ltd. (i. e., „AG“ or “SA”) or the term stock corporation (i. e., „Aktiengesellschaft“, «Socit anonyme», or “Societ anonima”). i)

Business year

Most stock corporations choose the calendar year as their business year. Normally, the 48 business year is determined by the articles of incorporation. To gain flexibility, the articles of incorporation may also provide that the business year is determined by the board of directors. In such case, a change of the business year would require an amendment of the articles of incorporation. The language of the CO states in several provisions that statutory reporting must be 49 made annually. Commentaries take the view that the business year of a corporation usually has 12 months, with the exception of the first and last business year and in case of a change of the business year. The first business year starts with the incorporation of the stock corporation.

42 43

See Section I.3 above. The Federal Government attempts to align Swiss corporate law with the corresponding EU law in the course of the planned revision of the CO provisions on the corporate name until January 1, 2007. See Adrian Drig, Zur Identifikationsnummer gemss Art. 936a OR, in: AJP 4/2004, 405-410, 409.

Adrian Drig

825

50

Switzerland

3.

Shareholders

a)

Rights and duties of a shareholder

aa)

Economic rights

(1)

General

II. Stock corporation

50 As a rule, each shareholder has a dividend right and a right to the liquidation proceeds. To protect a shareholder’s share participation, each shareholder possesses a subscription right (Bezugsrecht, droit de souscription pre´fe´rentiel, diritto d’opzione). In case of a share capital increase, the shareholder is entitled to acquire newly issued shares up to the percentage of his former share participation. Usually, the subscription price lies below the market price of the shares – entitling the shareholder to a direct economic benefit when participating in the share capital increase. The subscription right does not, however, provide only an economic benefit. It also protects the voting and other membership rights of the shareholder. (2)

Dividend right

51 Each shareholder is entitled to a proportionate share of the profits as shown in the balance sheet to the extent it is to be distributed to the shareholders. The resolution on the use of the balance sheet profit, in particular, the declaration of dividends, is within the power of the shareholders’ meeting.44 The shareholders’ rights to a proportionate share of the profits is limited by law and may also be restricted by the articles of incorporation. 52 Dividends may only be paid out of the balance sheet profit or out of reserves especially created for this purpose. Pursuant to Art. 674 para. 1 CO, a dividend may be declared only if the allocations to the general reserves and to the reserves provided for by the articles of incorporation have been made. The CO provides for the following allocation rules that must be observed when paying dividends: – Art. 671 para. 1 CO requires that – before any distribution of dividends is made – at least 5% of the annual profit shall be allocated to the general statutory reserves until they have reached 20 % of the paid-in share capital. – Further, 10% of the amounts that are distributed as a share of profits (dividend) after payment of a dividend of 5% need to be allocated to the general reserves. This 10 % allocation must be made even if the general reserves have reached 20 % of the paid-in share capital. 53 In addition to these allocation rules, the CO provides for restriction on the use of general reserves. According to Art. 671 para. 3 CO, the general reserves shall be used only to cover losses or for measures bound to maintain the stock corporation in bad business times, to counteract unemployment, or to soften its consequences as long as it has not exceeded half of the share capital. In other words, only balance sheet profit or reserves that exceed 50 % of the share capital are, without restrictions, available for distribution. 44

826

See Section II.3.b)aa) below.

Adrian Drig

3. Shareholders

Switzerland

54

Art. 671 para. 4 CO provides that the 10 % allocation rule as well as the 50 % restriction 54 rule do not apply to holding companies. Holding companies are defined as companies that primarily hold participations in other companies. 45 (3)

Agio

Any capital surplus payment (“agio”), i. e., the difference between the paid-in capital 55 and the nominal capital, can be distributed as dividends as follows: Pursuant to Art. 671 para. 2 subpara. 1 CO, any surplus over the par value paid in as consideration for issue of new shares, after deduction of the issue costs and to the extent such surplus is not used for depreciation or welfare purposes, must be allocated to the general reserves. A controversy in Swiss law exists whether the 50 %-rule applies to agio at all or whether 56 agio is forever excluded to be paid out as a dividend. No precedent court decision on the issue exists. The prevailing corporate practice follows the following principles: – Agio cannot be paid out during the course of the first business year. – After the first business year, the shareholders must approve the financial statements and are allowed to resolve to distribute a dividend in the amount of the agio less 50 % of the nominal capital. Many stock corporations choose to resolve, in the first annual ordinary shareholders’ 57 meeting, to convert the unrestricted portion of the general reserves into free reserves to emphasise the right of the shareholders’ meeting to distribute this amount, if so resolved. (4)

Interim dividend

Swiss corporate law does not recognize the concept of interim dividends. According to 58 Art. 675 para. 2 CO, dividends can only be paid out of the balance sheet profit and out of the unrestricted reserves. With regard to the procedural aspects for dividends, the law provides that a resolution to pay out dividends must be passed by the shareholders on the basis of audited financial statements. Further, the auditors must confirm that the proposed dividend complies with the law and with the articles of incorporation. Normally, a Swiss stock corporation resolves to pay out dividends at the annual ordinary 59 shareholders’ meeting, which is usually held in spring. The shareholders’ meeting can determine the due date of the dividend. It can also resolve that the dividend be paid out in several instalments, e. g., quarterly instalments. These instalment payments are, however, fixed in advance by the shareholders’ meeting and cannot be changed subsequently by the board of directors. Swiss corporate law, in principle, recognises the possibility of stock corporations paying 60 out advances on dividends. These advances constitute, however, nothing more than loans to shareholders that are granted between the date of payment of the advance and the date the dividend is resolved by the shareholders’ meeting. Until such resolution,

45

See also Section II.9.g) below.

Adrian Drig

827

61

Switzerland

II. Stock corporation

the stock corporation has the right to claim repayment of the advance, which is especially relevant in the context of bankruptcy.46 61 Certain learned authors have, however, pointed out that a stock corporation must be able to pay out an interim dividend, if in substance the requirements of an ordinary dividend are met. This means that interim dividends can be paid out if: – the interim dividend is decided upon by the shareholders in an extraordinary meeting; – this decision is made on the basis of an audited interim financial statement; and – the auditors confirm that the interim dividend violates neither the law nor the articles of incorporation. bb) Membership rights

62 Each shareholder must be granted at least one vote in the shareholders’ meeting. The voting right of the shareholder is proportional to the share participation he represents. The articles of incorporation may provide that no shareholder may exercise more than a maximum percentage of the total voting rights, regardless of the number of shares actually held. Along with the percentage limit, the articles of incorporation then usually provide that any holdings of shareholders acting in concert will be added to determine this limit. 63 Each shareholder has the right to participate in or to be represented at the shareholders’ meeting. The shareholder has the right to vote and to stand for election and – regardless of his share participation – may express his opinion and lodge motions in the meeting. cc)

Information rights

64 To efficiently make use of his rights, the shareholder must be sufficiently informed about the stock corporation of which he holds shares. Thus, each shareholder has the right to inspect the minutes of the shareholders’ meeting. Furthermore, the stock corporation must provide the annual business report (including the annual financial statements, the annual report, and the consolidated annual financial statements, if any)47 and the auditors’ report upon a shareholder’s request. Further information is only required to be provided as far as such information is necessary for the shareholder to exercise his shareholder rights. The stock corporation may refuse to provide additional information to a shareholder in case such transfer of information may endanger its interests and privacy. 65 To obtain further information without endangering the stock corporation’s business secrets, the CO stipulates an alternative: Any shareholder may ask the shareholders’ meeting to demand an inquiry of certain facts by a special auditor (special audit; Sonderpru¨fung, controˆle spe´ciale, verifica speciale) who will have extensive information rights but must regard the stock corporation’s business secrets when presenting his results. This concept has proven to be rather ineffective in practice, however.

46 47

828

Advances on dividends may cause tax problems (deemed interest). See Section II.9.c) below.

Adrian Drig

3. Shareholders

Switzerland

66

dd) Further protective rights

Each shareholder may challenge the validity of the resolutions of the shareholders’ 66 meeting if they violate Swiss corporate law, the stock corporation’s articles of incorporation, or if individuals participated in the meeting and contributed to the resolutions who were not legally allowed to do so. For exercising this right, the shareholder must prove an interest meriting protection and must not have consented to the resolution in question. Any resolutions of the shareholders’ meeting or of the board of directors that violate essential legal provisions are null. Any shareholder with a legal interest may claim the declaration of nullity.48 Each shareholder may sue the corporate bodies (Organe, organes, organi) of a stock 67 corporation in case of negligent discharge of their duties (director’s liability). 49 As with the general liability provisions of the CO, the negligent acts or omissions must have caused damage to the stock corporation. This liability applies to all members of the board of directors and to the stock corporation’s officers as well as to the founders, the auditors, and the liquidators. The shareholder may demand the dismissal of the liquidators for important reasons. He may also sue other shareholders, members of the board of directors, and other closely related persons if they have unjustly acquired benefits from the stock corporation. A successful lawsuit obliges them to indemnify the stock corporation. A shareholder may demand the stock corporation’s dissolution in certain limited sta- 68 tutorily prescribed situations, e. g., if the stock corporation lacks the required corporate bodies or if the stock corporation’s founding was defective.50 ee)

Shareholders with qualified participations

Shareholders with 10 % of the voting rights (held on their own or in conjunction with 69 others) have the right to call a shareholders’ meeting. Also, they may add items to the agenda. And they may ask the judge to appoint a special auditor even without the consent of the shareholders’ meeting. In doing so, they must make a credible argument that a breach of law or of the stock corporation’s articles of incorporation occurred and that thereby the stock corporation incurred damages. Shareholders with 10 % of the stock corporation’s voting rights may lodge a request with the competent judge to dissolve the stock corporation for important reasons. Shareholders representing CHF 1,000,000 par value may add items to the agenda of a 70 general meeting of shareholders but they do not have the right to call a general meeting, unless they also have at least 10 % of the voting rights.

48 49

50

See Section II.3.c) below. Within the past few years there has been a substantial increase in legal actions brought against board members on the basis that they neglected to supervise the management of the stock corporation diligently. See Section II.8.a) below. See, also, Section II.11 below.

Adrian Drig

829

71

Switzerland

II. Stock corporation

71 Shareholders representing CHF 2,000,000 par value may demand that the court appoint a special auditor under the same prerequisites as the shareholders with 10 % of the voting rights (see above). 72 Shareholders with more than 331/3 % of the voting rights can block certain decisions of the shareholders’ meeting that require a qualified majority.51 73 Shareholders with 50 % of the voting rights can block any resolution of the shareholders’ meeting that demands an ordinary majority.52 74 Shareholders with 50 % of the voting rights may also dismiss the members of the board of directors, the auditors, and the liquidators. ff)

Duties

75 Other than the duty to fully pay in the share subscribed, a shareholder of a stock corporation has no duties vis--vis the company or its corporate bodies. b)

Shareholders’ meeting

aa)

Powers

76 The supreme corporate body of the stock corporation is the shareholders’ meeting through which the shareholders act. The powers of the shareholders’ meeting’s are determined by law and the articles of incorporation. In essence, the shareholders’ meeting’s main tasks are as follows: – establishing internal legislation (articles of incorporation); – electing the other corporate bodies (board of directors and auditors); – supervising (approval of the annual report, including the annual financial statements, and discharge of the board members); and – administrating (allocation of balance sheet profit, if any). 77 Specifically, the shareholders’ meeting has the following inalienable powers: – to adopt and amend the articles of incorporation; – to elect and dismiss the members of the board of directors and the auditors; – to approve the annual report, including the annual financial statements, as well as to pass resolutions regarding the allocation of profits as shown in the balance sheet, in particular, to declare dividends and bonus payments to the members of the board of directors; – to discharge the members of the board of directors; and – to pass resolutions regarding other matters which are by statutory law or by the articles of incorporation reserved to the shareholders’ meeting (e. g., capital increase and capital reduction or issuing preference shares).

51 52

830

See Section II.3.c) below. See Section II.3.c) below.

Adrian Drig

3. Shareholders

Switzerland

78

bb) Calling

The shareholders’ meeting is called by the board of directors or, if necessary, by the 78 auditors.53 On the other hand, one or several shareholders representing at least 10 % of the share capital, may request the board of directors to call a shareholders’ meeting. Shareholders representing shares with a nominal value of at least CHF 1,000,000, or holding at least 10 % of the stock corporation’s share capital may request specific items to be included in the shareholders’ meeting’s agenda and to be resolved upon by such shareholders’ meeting even if the board of directors does not agree that these items be brought forward.54 The shareholders’ meeting must be called at least 20 days prior to the day of the 79 meeting.55 The notice of the meeting must state the agenda, the motions of the board of directors, and the motions of the shareholders who have requested the shareholders’ meeting or who requested that an item be included. For the annual shareholders’ meeting, both the annual report (including the annual financial statements) and the auditors’ report must be made available for examination by the shareholders at the head office of the stock corporation at least 20 days prior to the date of the meeting. While minority and/or dissenting shareholders have no right to require the board of 80 directors to circulate their statements to other shareholders, each shareholder with at least one voting share may make statements and motions to the shareholders’ meeting as long as they are limited to the items on the agenda. Because minority and/or dissenting shareholders do not have access to the share register, and the mandatory invitation period between the publication of the agenda and the shareholders meeting of at least 20 days is very short to organize themselves, proxy fights are almost unheard of in Switzerland. The owners or representatives of all shares may hold a shareholders’ meeting without 81 observing the formal requirements for calling (Universalversammlung, re´union de tous les actionnaires, riunione di tutti gli azionisti). All matters falling within the competence of the shareholders’ meeting may be validly discussed and resolutions passed at such meeting as long as the owners or representatives of all shares are present. cc)

Meeting

A shareholders’ meeting can be held outside of Switzerland. If it has to take resolutions 82 for which a publicly authenticated deed is required, the law of the foreign place governing public authentications must be observed and must be certified by the competent foreign authority. Shareholders’ meetings must be held at least once a year. The annual shareholders’ 83 meeting that approves the stock corporation’s annual financial statements and resolves upon the allocation of profits, if any, must take place no later than six months after the 53 54 55

The liquidator(s) is /are also entitled to call a shareholders’ meeting. See Section II.3.a)e) above. According to a SWX circular, companies listed on the SWX are required to inform the SWX at least three months in advance about the date of their next annual shareholders’ meeting.

Adrian Drig

831

84

Switzerland

II. Stock corporation

close of the business year. Annual shareholders’ meetings not held within this time period are considered to be valid. If, however, the stock corporation or its creditors suffer any damages due to such delay, the members of the board of directors may be held liable for such damages if caused by willful or negligent misconduct of their duties. 84 The shareholders’ meeting is generally chaired by the president of the board of directors, or in his absence, by any other member of the board of directors, or by another chairperson elected for that meeting by the shareholders’ meeting. The chairperson designates a secretary who keeps the minutes and the individual who counts the votes; normally, neither of them needs to be a shareholder. The board of directors is responsible for keeping the minutes that are to be signed by both the chairperson and by the secretary. dd) Exercise of membership rights

85 Shareholders exercise their rights at the physical shareholders’ meeting where they may represent their shares personally or by proxy, i. e., a third person who need not be a shareholder unless so stipulated in the articles of incorporation. 86 The person, who proves possession of bearer shares, is able to exercise the membership rights attached to such shares. In practice, listed companies regularly provide admission cards to the shareholders’ meeting to be issued against proof of deposit of the bearer shares with a bank or the stock corporation until the end of the meeting. 87 Membership rights attached to registered shares may be exercised by the person registered as shareholder in the share register kept by the stock corporation. The date of entry in the share register determines the shareholder’s entitlement vis--vis the stock corporation. Listed stock corporations regularly fix a cut-off date a few days before the shareholders’ meeting, after which the share register is closed for entries until the date of the meeting. 88 The banks acting as depositary of their customers’ shares may not use such shares to vote against the board of directors’ motions unless they have specific instructions to do so. c)

Shareholder resolutions

89 The shareholders’ meeting passes its resolutions and carries out its elections with a majority of the votes allocated to the shares cast56 to the extent that neither the law nor the articles of incorporation provide otherwise. 90 By law, the following resolutions require a qualified majority of at least two thirds of the votes represented as well as the majority of the par value represented (such quorum may be increased by the stock corporation’s articles of incorporation): – change of the stock corporation’s purpose; – creation of shares with privileged voting rights; 56

832

Abstentions and blank votes are not considered in the calculation of the majority.

Adrian Drig

3. Shareholders

– – – – – –

Switzerland

91

introduction of a transfer restriction for registered shares; creation of authorised or conditional share capital; increase of share capital; limitation and withdrawal of subscription rights; change of the stock corporation’s domicile; and dissolution of the stock corporation without liquidation.

By law, the following resolutions require an ordinary majority of the votes represented 91 (such quorum may be increased by the stock corporation’s articles of incorporation): – election of the members of the board of directors and the auditors; – any amendment to the articles of incorporation that does not require a qualified majority (see above); – approval of the annual report and the annual consolidated financial statements, if any; – approval of the annual financial statements and decisions on the allocation of the profits; and – discharge of the members of the board of directors. Persons who have been involved in the management have no right to vote on resolu- 92 tions concerning the discharge from liability of the members of the board of directors. Resolutions are passed at physical shareholders’ meetings; circular resolutions or voting 93 over the internet are not accepted under Swiss law. The board of directors and any shareholder57 may challenge resolutions of the share- 94 holders’ meeting, which violate the law or the articles of incorporation. In particular, resolutions may be contested which: – revoke or limit shareholders’ rights, thereby violating the law or the articles of incorporation; – revoke or limit shareholders’ rights without proper reason; – discriminate against or put at a disadvantage shareholders in a manner not justified by the corporate purpose; or – terminate the profit orientation of the stock corporation without the consent of all shareholders. In particular, resolutions are null which: – revoke or limit the shareholders’ right to participate in the shareholders’ meeting, the minimum voting right, the right to bring legal action, or other rights granted by mandatory provisions of law; – limit the shareholders’ right to control beyond the extent provided by law; or – disregard the fundamental structures of the stock corporation or violate the provisions for the protection of the share capital.

57

95

See Section II.3.a)d) above.

Adrian Drig

833

96

Switzerland

II. Stock corporation

96 A court order making null a resolution of the shareholders’ meeting is binding upon all shareholders. The right to challenge resolutions expires if the lawsuit is not filed within two months following the shareholders’ meeting. d)

Shareholder exclusion

97 Other than by a squeeze-out, pursuant to the Federal Law on Merger, Demerger, Transformation and Transfer of Assets (Merger Law) generally,58 and pursuant to the Federal Law on Stock Exchanges and Securities Trading (SESTL) with respect to listed stock corporations, a shareholder of a stock corporation cannot be excluded. The board of directors, however, may annul the rights of a shareholder who has not paid in his share in full. In such a case, the articles of incorporation may require the defaulting shareholder to pay a penalty.

4.

Shares

a)

Classes of shares

98 A stock corporation may issue the following classes of shares: Common shares, voting shares, preference shares, participation certificates (non-voting shares), and profit-sharing certificates (non-equity shares). aa)

Common shares

99 The minimum par value of shares in a stock corporation is CHF 0.01. Common shares may be issued in the form of registered or bearer shares either at par value or at a premium price above par value. Bearer shares may be issued only if their entire par value has been fully paid in. They may not be subject to any transfer restriction. Registered shares may be issued if at least 20 % of their nominal value has been paid in; the balance remains a personal liability of the shareholder. Registered shares may be subject to a transfer restriction.59 100 Share certificates must state the stock corporation’s corporate name and domicile and the shares’ par value, paid-in amount and type (bearer or registered share). But for a large number of issued shares, where facsimile signatures are permitted, they must be signed by at least one member of the board of directors. 101 A shareholder’s sole statutory obligation is to pay in the issue price of the shares. No supplementary capital payments or other obligations can be set forth in the stock corporation’s articles of incorporation.60 As a matter of law, each share entitles the holder to one vote. Establishing shares that carry more than one vote is not permitted.

58 59 60

834

See Section II.13.a) below. See Section II.4.b) below. See Section II.3.a)f) above. As opposed to obligations by virtue of corporate law, a shareholder may validly undertake obligations in the contractual framework of a shareholder’s agreement.

Adrian Drig

4. Shares

Switzerland

102

All common shares grant their holders the same economic rights, i. e., dividend entitlement, right to liquidation proceeds, and subscription rights, and membership rights.61 bb) Voting shares

A stock corporation may issue different classes of shares with different par values but 102 which confer the same voting rights by stipulating in the articles of incorporation that each share entitles a shareholder to one vote regardless of its par value, thus creating privileged voting shares. Any such privilege is limited to a maximum ratio of 1:10, i. e., shares with increased voting rights may have an up to tenfold voting power compared to common shares. Voting shares must be issued in registered form. cc)

Preference shares

A stock corporation may issue shares that grant their holders preferential rights to 103 dividends and/or liquidation surplus. dd) Participation certificates

Participation certificates grant essentially the same economic rights as common shares 104 but do not confer any voting rights or any ancillary membership rights.62 The aggregate nominal value of the participation capital may not exceed two times the issued share capital. ee)

Profit-sharing certificates

Particularly when a stock corporation in financial distress is reorganized, it may also 105 issue an equity instrument known as profit-sharing certificates. Profit-sharing certificates have no par value and no voting rights. Their holders may, however, participate in future profits of the stock corporation on the basis of their rights to a dividend, liquidation proceeds, or their right to subscribe for new shares. b)

Transfer of shares

Share certificates are negotiable instruments. The due transfer of bearer shares and 106 transfer of title to the transferee (acquirer) require concluding a (purchase) agreement and delivering the share certificates to the transferee, the share certificates representing the bearer shares, if any such certificates have been issued. Possession of the certificates may also be transferred by a so-called possession order whereby they are held by a third party (e. g., a bank) that is ordered to hold them on behalf of the transferee. In addition to the aforementioned requirements that also apply to the transfer of 107 registered shares, the certificates representing registered shares must also be endorsed. In relation to the stock corporation, the transferee must be registered in the share register to be considered a shareholder of the stock corporation. If the shares are not represented by certificates, the transfer must be made in accordance 108 with the rules governing the assignment of claims. The assignment must be made in 61 62

See Section II.3.a) above. See Section II.3.a)b) above.

Adrian Drig

835

109

Switzerland

II. Stock corporation

writing. The shares of stock corporations listed in Switzerland are usually not represented by certificates, but placed in a collective custody system owned and operated by the Swiss banks. Share transfers in the system are effected by book entry electronically, i. e., no transfer of documents is necessary. 109 A privately held company may provide in its articles of incorporation that registered shares may only be transferred with the stock corporation’s consent. The board of directors may refuse this consent for important reasons specified in the articles of incorporation, or for statutory reasons. Reasons are deemed important if they relate to the composition of the shareholders’ circle and justify the refusal in view of the stock corporation’s purpose or its economic independence.63 The escape clause and the fiduciary clause are the two statutory justifications, which give the stock corporation the right to withhold consent. Under the escape clause, the stock corporation may refuse without giving any reasons, provided it offers to acquire the shares at their real value at the time the request for consent is submitted, and for its own account, for the account of other shareholders, or of third parties. Under the fiduciary clause, the stock corporation may withhold consent if the acquirer does not expressly declare that he has acquired the shares in his own name and on his own account. For each of the foregoing reasons, title to the shares subject to transfer restrictions and their respective rights, do not pass to the acquirer pending the board of directors’ consent. 110 A listed stock corporation may only refuse a transfer of shares if the articles of incorporation stipulate a percentage limit of registered shares up to which an acquirer must be recognized as a shareholder and this limit is exceeded, or if the acquirer, upon the stock corporation’s request, does not expressly declare that he acquired the shares in his own name and for his own account (fiduciary clause). c)

A stock corporation’s own shares

111 A stock corporation may acquire up to 10% of its own shares (treasury stock) if and to the extent it has freely disposable equity (i. e., reserves) available. Concurrently, the stock corporation must set aside an amount corresponding to the value of the acquisition of the treasury stock as a separately held capital reserve to ensure that no dividends are paid out in the respective amount.64 If the stock corporation disposes of or cancels the treasury stock, the reserve may be dissolved into non-restricted reserves up to its acquisition value. A stock corporation’s own shares held in excess of 10 % must be sold and transferred immediately. 112 An unlisted stock corporation that acquires its own shares in connection with a transfer restriction of its registered shares is allowed to hold up to 20 % of its own shares for up to two years. In other words, within two years, the stock corporation is required to sell or cancel, by way of capital reduction, that part of the shares in excess of 10 %. 63

64

836

Typically, any refusal of the consent is justified if the shareholder is a competitor of the stock corporation. The stock corporation must disclose in the notes to its annual financial statements the number and price of own shares purchased and sold.

Adrian Drig

5. Articles of incorporation

Switzerland

113

For the time the stock corporation holds its own shares, the voting rights of these shares 113 are suspended. The suspension of voting rights applies regardless of whether the shares are held by the stock corporation itself or by one of its subsidiary companies.65

5.

Articles of incorporation

a)

Mandatory content

aa)

Provisions required by law

The articles of incorporation of a stock corporation must contain provisions on: – its corporate name and domicile; – its corporate purpose; – the amount of share capital and the contributions made thereto; – the number, the par value, and the type of shares; – the calling of a shareholders’ meeting and the voting rights of the shareholders; – the corporate bodies for the administration and the audit; and – the form in which the stock corporation shall publish its notices.

114

bb) Additonal provisions

To be binding, the following provisions must be included in the articles of incorpora- 115 tion: – the amendment of the articles of incorporation deviating from the provisions required by law; – the payment of shares of profits to the members of the board of directors (Tantiemen, tantie`mes, partecipazione agli utili); – the agreement to pay construction interest (Bauzinsen, inte´reˆts intercalaires, interessi per il periodo d’avviamento); – the limitation of the duration of the stock corporation; – liquidated damages in case of delayed capital contribution; – authorized and conditional capital increase; – the possibility to convert registered shares into bearer shares and vice versa; – the restriction of the transfer of registered shares; – the preferential rights of individual classes of shares, participation certificates, profit-sharing certificates, and founders’ shares; – the restrictions on voting rights and the rights of a shareholder to appoint a proxy; – the cases not provided for by law in which the shareholders’ meeting may pass resolutions with a qualified majority only; – the authorization to transfer the management to individual members of the board of directors or to third persons; and – the organization and the functions of the auditors if they exceed the statutory provisions.

65

For the tax treatment of the repurchase of a stock corporation’s own shares, see Section II.10.e) below.

Adrian Drig

837

116

Switzerland

II. Stock corporation

116 If a shareholder makes a contribution in kind, the articles of incorporation must indicate the object and its value, the name of the contributor, and the shares issued to the contributor. If the stock corporation acquires assets from shareholders or third parties, or if it intends to make such acquisition of assets, the articles of incorporation must indicate the object, the name of the transferor, and the consideration to be given by the stock corporation. If, upon incorporation, particular benefits are stipulated in favour of the founders or other persons, the articles of incorporation must list the names of the beneficiaries and precisely indicate the stipulated benefits as to content and value. Provisions in the articles of incorporation concerning contributions in kind or acquisitions of assets may be repealed by resolution of the shareholders’ meeting after ten years. b)

Amendment of the articles of incorporation

117 Any resolution of the shareholders’ meeting or – in certain limited cases – the board of directors, which amends the articles of incorporation must be made in the form of a notarized deed.66 The board of directors must file the resolution, together with supporting documents, with the commercial registry. The resolution becomes effective also against third parties upon its entry in the commercial register. c)

Capital increase and reduction

aa)

Capital increase

118 The share capital of a stock corporation may be increased by way of a shareholder resolution and a subsequent board resolution, which amends the articles of incorporation. The corresponding shareholders’ and board meetings must be held in the presence of a notary public, and the resolutions must be recorded in a notarized deed. 119 Three different types of capital increase may be distinguished: – Ordinary capital increase: The shareholders’ meeting resolves on the capital increase and empowers the board of directors to increase the capital within three months. In practice, the ordinary capital increase is executed by the board of directors immediately following the shareholders’ meeting. – Authorized capital increase: The shareholders’ meeting amends the articles of incorporation and authorizes the board of directors to issue new shares at its discretion within a period of up to two years. The newly issued shares are limited by amount to no more than half of the existing share capital. – Conditional capital increase: The shareholders’ meeting indirectly increases the capital subject to conditions by issuing – or authorizing the board of directors to issue – rights to acquire new shares (e. g., options or conversion rights). These rights may be issued (i) to the stock corporation’s employees, or (ii) in connection with capital market transactions such as issuing of convertible bonds, bonds with stock options, or similar instruments.

66

838

For quorum requirements for shareholder resolutions on amendments of the articles of incorporation, see Section II.3.c) above.

Adrian Drig

6. Board of directors

Switzerland

120

The existing shareholders maintain a subscription right on the newly issued shares in 120 proportion to their existing equity interest.67 The subscription right may be revoked for cause by a shareholder resolution. bb) Capital reduction

A shareholder resolution to reduce capital (without the concurrent increase to the 121 original amount by new fully paid-in capital) requires a special report by especially qualified auditors confirming that, notwithstanding the capital reduction, the claims of all the creditors are covered. The resolution and the notice to the creditors, that they may file their claims and demand satisfaction or surety within two months following the third publication, must be published three times in the SOGC and in any means of publication provided for in the stock corporation’s articles of incorporation. The creditors’ call is not required if the share capital is reduced exclusively to eliminate capital impairment caused by losses.

6.

Board of directors

a)

Directors

aa)

Election and dismissal

The members of the board of directors are elected by the shareholders’ meeting for a 122 term of three years, unless otherwise provided for by the articles of incorporation. The maximum term is six years. Re-election is possible. Any board member may be dismissed at any time, for any reason, or for no reason, by a 123 shareholders’ meeting, with immediate effect, even if the term has not expired. This unrestricted right of the shareholders to dismiss a board member corresponds with the right of each board member to resign at any time and for any reason. bb) Eligibility and composition

The board of directors may consist of one or several members68 all of whom must be 124 shareholders of the stock corporation on whose board they are serving,69 unless they are representatives of a legal entity that is a shareholder.

67 68

69

See Section II.3.a)a) General above. The board of directors consists of at least one individual. The board of directors of a bank, however, must consist of at least three members. At least one member of the management of a bank must have proven knowledge and experience of Swiss banking legislation and practices. Further, a Swiss bank must be “managed from Switzerland,” and the members of the management are required to reside in a place from which they may exercise their duties in a factual and responsible manner. Recording ownership of one share for each board member suffices.

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125

Switzerland

II. Stock corporation

125 According to the CO, the majority of the members of the board of directors of a stock corporation must be Swiss citizens and be domiciled in Switzerland.70 The Federal Council may grant exceptions to this rule for companies whose principal purpose consists in holding participations in other enterprises, provided the majority of these enterprises are abroad. The citizenship requirement, however, has been relaxed in July 2003: It no longer applies to citizens of the European Union (EU) and of the European Free Trade Association (EFTA), i. e., EU, EFTA, and Swiss citizens are treated equally.71 At least one board member domiciled in Switzerland must either have sole signing authority to bind the stock corporation or must be empowered to sign jointly with one of the other members domiciled in Switzerland. 126 Swiss law does not provide for a mandatory participation of employees on the board of directors.72 127 No minimum number of non-executive or independent73 members of the board of directors is required. The Swiss Code of Best Practice for Corporate Governance74 recommends that the majority of the board of directors be composed of non-executive75 members. 128 There is also no legal restriction on the number of board seats an individual may hold concurrently in different stock corporations. 129 In practice, the functions of the chairman (or a member) of the board of directors and of the chief executive officer are frequently performed by the same individual.76 Except for 70

71

72 73

74 75

76

840

The requirement dates back to the First World War. It was intended to safeguard the Swiss (neutral) character of Swiss companies. On July 25, 2003, the FOCR issued a circular letter that stated that the principle of non discrimination under the bilateral agreement on the free movement of persons between the EU and Switzerland which entered into force on June 1, 2002 and a similar agreement between the EFTA and Switzerland must also be adhered to in Swiss stock corporation law. The FOCR, therefore, concludes that the requirement of Swiss citizenship for the majority of the members of the board of directors of a stock corporation qualifies as direct discrimination, which is no longer permitted. The domicile requirement, however, stands as it is, i. e., the majority of the board members must be domiciled in Switzerland. See Section II.6.c) below. The Swiss Code of Best Practice for Corporate Governance defines an “independent” member of the board of directors as a non-executive member who was not a member of the executive management in the past three years and who has no, or comparatively minor, business relations with the company. See Section II.7.d) below. The Swiss Code of Best Practice for Corporate Governance defines a “non-executive” member of the board of directors as an individual who does not perform any line management function within the company. In such a case, the Swiss Code of Best Practice for Corporate Governance recommends providing for adequate control mechanisms, e. g., by appointing an experienced non-executive member as lead director.

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6. Board of directors

Switzerland

130

banks where the members of the board of directors may not be members of the management, this is neither required nor prohibited. cc)

Powers and duties

The board of directors may make decisions on all matters that by law or by the articles 130 of incorporation are not allocated to the shareholders’ meeting. The board of directors must manage the business of the stock corporation insofar as it has not been delegated to the (senior) management.77 The board of directors has certain non-transferable inalienable duties: – the ultimate management of the stock corporation and the issuance of the necessary directives (i. e., the board of directors must set the strategic goals, allocate the corporate resources for the purpose of achieving such goals, and control the management in pursuing these goals); – the establishment of the organizational structure; – the organization of the accounting, the financial controls as well as the financial planning; – the appointment and removal of the persons entrusted with the management and the representation of the stock corporation as well as the granting of signing authority to them; – the ultimate supervision of the persons entrusted with the management, in particular, regarding compliance with the law, the articles of incorporation, regulations, and directives; – the preparation of the annual business report and the shareholders’ meetings and the implementation of the latter’s resolutions; and – the notification of the judge in the case of the stock corporation’s over-indebtedness.

131

The shareholders’ meeting may not withdraw these powers from the board of directors. 132 At most, the shareholders’ meeting can only indirectly influence the course of action taken by the board of directors by its power to dismiss any of its members at any time.78 In addition to the duties imposed by the CO, the members of the board of directors have 133 duties and may become liable for both social security contributions under the applicable social security laws as well as for withholding taxes pursuant to the Federal Withholding Tax Law. Case law under these laws has developed towards strict liability so that the plaintiff does not have to show negligence.

77 78

The delegate of the board of directors is both a member of the board of directors and the head of the senior management. The role of a delegate of the board of directors is rooted in the French speaking part of Switzerland where the “prsident directeur gnral” had a long tradition of being the strong man, in line with the situation in France. It is also similar to that of a chief executive officer (CEO) in the United States or the managing director in the United Kingdom. See Section II.6.b)bb) below. See Section II.6.a)aa) above.

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841

134

Switzerland

II. Stock corporation

dd) Meetings and disclosure of practice

134 The board of directors is required to hold at least one board meeting per year for preparing the annual shareholders’ meeting. The Swiss Code of Best Practice for Corporate Governance recommends that at least four meetings be held annually according to the stock corporation’s needs. Each member of the board of directors may request that a board meeting be called at any time. 135 Swiss law does not require a stock corporation to disclose the practices of the board of directors. Listed companies, however, are required by the SWX Directive on Information relating to Corporate Governance of Listed Companies79 to disclose information about its internal organizational structure, basic principles regarding the allocation of responsibility between the board of directors and the senior management, and information and control instruments regarding the senior management. ee)

Compensation

136 The board of directors of a stock corporation determines the remuneration of its members and senior management. 137 While Swiss law does not affect per se the compensation of the members of the board of directors and senior management, the term of their service contracts, loans granted by the stock corporation to them, or other transactions between the company and them, the details regarding these matters must be disclosed by listed companies pursuant to the SWX Directive on Information relating to Corporate Governance of Listed Companies. 80 138 Swiss board members acting in a fiduciary capacity customarily receive an annual fee in compensation for their administrative services and responsibilities. The amount of the annual fee depends on the size and the activities of the particular stock corporation. The annual fee generally does not include fees for legal services rendered by attorneys acting as board members. b)

Management and representation

aa)

Duty of care and loyalty

139 The members of the board of directors, as well as third parties entrusted with the management, are required to carry out their duties with due care and loyalty and must duly safeguard the best interests of the stock corporation. In addition, they must treat the shareholders equally under the same circumstances. 140 The duty of care includes, in particular, the duty to accept the election as member of the board of directors only if the person is sufficiently qualified for the office; to appropriately organize the corporate matters; to perform the office with diligence; and to diligently select, instruct, and supervise the subordinates.81 79 80 81

842

See Section II.7.c) below. See Section II.7.c) and Section II.7.b) below. For director’s liability, see Section II.8.a) below and Section II.3.a)d) above.

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6. Board of directors

Switzerland

141

The duty of loyalty requires a member of a board of directors not to pursue his interests 141 to the detriment of the stock corporation’s interests, not to compete with the stock corporation, and to observe the confidentiality of the stock corporation’s affairs. Under the duty to treat the shareholders equally, the board of directors may not give 142 preferential treatment to certain groups of shareholders without compelling justification. Unequal treatment may typically arise with payments to shareholders, information requests, and exceptions from share transfer restrictions. bb) Delegation of management

As a rule, the board of directors delegates day-to-day management82 of the stock 143 corporation to individual members or officers who are not members. This delegation must be authorized in the stock corporation’s articles of incorporation and further specified in its organizational regulations to be issued by the board of directors.83 The organizational regulations contain provisions governing the stock corporation’s executive bodies, the delegation of powers and duties, the supervision and control, the meetings and decision making process of the corporate bodies, and the reporting system. While there is no such legal requirement, the board of directors of large Swiss stock 144 corporations, especially if they are listed, delegates powers and duties to various committees that consist of members of the board of directors. The Swiss Code of Best Practice for Corporate Governance recommends that an audit,84 compensation85 and nomination committee be established. In practice, the specific functions and powers of these committees still vary substantially. cc)

Representation

The board of directors represents the stock corporation towards third parties. Unless the 145 articles of incorporation or the organizational regulations provide otherwise, each member has the power to represent the stock corporation individually. The board of directors may delegate the power of representation to one or several members or officers who are

82

83

84

85

The board of directors’ non-transferable inalienable duties may not be delegated. See Section II.6.a)cc) above. In contrast to the general rule set forth in the CO, the BankL requires that the management of a bank be delegated by the board of directors to the management. The same individual may not belong to both the board of directors and the management. The audit committee typically deals with quality assurance regarding accounting principles, their implementation and disclosure as well as internal control, risk management, and compliance issues. The Swiss Code of Best Practice for Corporate Governance recommends that the audit committee consist of non-executive, preferably independent members of the board of directors. The main duty of the compensation committee is to assess the directors’ remuneration. The Swiss Code of Best Practice for Corporate Governance recommends that a majority of the members of the compensation committee be non-executive and independent board members. See also Section II.6.a)ee) above.

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843

146

Switzerland

II. Stock corporation

not members.86 At least one member of the board of directors – or two having joint signing authority – must be authorized to represent the stock corporation. 146 Individuals authorized to represent the stock corporation may, in the name of the stock corporation, perform all legal acts that may arise within the stock corporation’s purpose. As a rule, a restriction of this power to represent is not effective against bona fide third parties. 147 The stock corporation is liable for any damage resulting from torts committed by a person authorized to manage or to represent the stock corporation in the course of its business activities. c)

No supervisory board/no workers council

148 In principle, a stock corporation has a one-tier board structure. 87 The board of directors is granted, however, considerable organizational discretion as it may delegate some or most of its powers, except for the inalienable duties, to its committees or individual members or to the senior management. This is especially done by listed stock corporations which have, therefore, a de facto two-tier structure. 88 149 Swiss law does not require that employees be represented on the board of directors of a stock corporation. 89

7.

Corporate Governance

a)

Definition

150 Corporate governance is not defined under Swiss law, although the topic is not new and has been widely discussed in recent years. It deals with the structure of a company’s executive positions, i. e., management, board of directors, and their committees. It also deals with its system of checks and balances and the relationship between the executive positions, the shareholders, and third party stakeholders. b)

Law

151 Certain terms and conditions applying to corporate governance can be found in the CO, the SESTL, and the Federal Law on Banks and Savings Banks (BankL). In addition, case law and other regulatory guidance, in particular issued by the Federal Banking Com86 87

88

89

844

See Section II.6.b)bb) above. Switzerland does not have the German two-tier supervisory system in place whereby the senior management (Vorstand) is supervised by a board (Aufsichtsrat) that must include outside directors and employee representatives of trade unions. See Section II.6.b)bb) above. The BankL requires that the executive management and the supervision of the bank be assigned to two separate corporate bodies. See Section II.6.a)bb) above.

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7. Corporate Governance

Switzerland

152

mission (FBC), may be relevant. In general, a company’s articles of incorporation and organizational regulations influence the principles of corporate governance as well. In June 2004, the Federal Council presented a legislation project to revise the CO,90 152 more specifically, the minimum content of the notes to the financial statements of listed companies, in order to establish transparency regarding the remuneration of and the participations held by board members and members of senior management. The revision requires the disclosure of the aggregate remuneration received by current and former members of the board of directors, senior management, individuals related to the foregoing, and the individual amounts granted to the board members and to the one member of senior management receiving the highest remuneration (generally, the CEO). Further to be disclosed in the notes to the annual financial statements are loans granted by the company to members of senior management and the participations in the company held by board members, senior management, and individuals related to the foregoing, if any. c)

SWX Directive

The SWX Directive on Information relating to Corporate Governance of Listed Com- 153 panies that came into force on July 1, 2002 is quasi-binding.91 The principle of the directive is “comply or explain.” It sets minimal standards regarding the disclosure of a company’s internal organization and its relationship with shareholders (but no information with regard to third party stakeholders other than shareholders) and provides investors with certain additional key information about corporate governance of listed companies.92 Non-compliance leads to sanctions under the SWX Listing Rules. d)

Swiss Code of Best Practice

On March 25, 2002, the Swiss Business Federation (economiesuisse) issued the Swiss 154 Code of Best Practice for Corporate Governance. The Code is designated for listed companies. It does not contain enforceable standards, but only recommendations (soft law). It may become over time, however, the business standard in certain areas so that the diligence of officers and board members will be measured against it. The recom90

91

92

The Federal Council deemed as insufficient the SWX auto-regulation, i. e., the SWX Directive on Information Relating to Corporate Governance of Listed Companies (see Section II.7.c) below). The Guidelines apply to all companies with a primary listing on the SWX regardless of the law pursuant to which the company has been incorporated. In a few cases, companies incorporated in Switzerland having a primary listing on the SWX have a secondary listing abroad, in particular, at the New York Stock Exchange (e. g., ABB, Adecco, Ciba SC, Converium, Credit Suisse Group, Novartis, Serono, Swisscom, Syngenta and UBS), though with (very) low trade volumes. The information to be disclosed includes the group structure and shareholders, the board of directors and the management (including details of their remuneration and participation in the company’s share capital), the shareholders’ participation rights, the dividend payment policy, and the policy on changes of control and defense tactics.

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845

155

Switzerland

II. Stock corporation

mendations establish standards regarding shareholders’ rights before, during, and after a shareholders’ meeting. Further topics include duties of the board of directors, its composition and organization, its handling of conflicts of interests, its committees and internal control, and the management of risks.

8.

Selected liability and capitalization questions

a)

Director’s liability

155 The members of the board of directors and officers who intentionally or negligently violate their fiduciary duties towards the stock corporation may be held liable for any damages caused thereby to it as well as to the shareholders and creditors of the stock corporation. When they delegate part of their responsibility and duties, they may only be held liable if they have failed to choose, direct, or control the individuals to whom they have entrusted such responsibility and duties. This holds unless non-transferable and inalienable duties have been transferred.93 156 To prevail with a claim, an intentional or negligent breach of duties by the board members or the officers needs to be established. Also to be established is a damage to the stock corporation and that this damage was caused by the breach of duty: – Breach of duty: Art. 717 para. 1 CO requires the members of the board of directors and all other persons entrusted with the management of the stock corporation to perform their duties with due care and to safeguard the interests of the stock corporation in good faith. Whether a director or manager of the stock corporation has exercised due care is determined with recourse to an objective standard, comparing the behaviour in question with that of a reasonable, prudent director /manager under the same conditions. Any deviation from such reasonable behaviour standard qualifies as a breach of duty. – Damage: In the case of bankruptcy, the creditors suffer damage because the stock corporation is no longer able to meet its obligations towards the creditors. Since the creditors’ damage is deemed to be only “indirect” (the director’s /manager’s acts cause damage to the stock corporation, thereby damaging the stock corporation creditors’ interests), the creditors must sue on behalf and on the account of the stock corporation. – Causation: The director’s /manager’s breach of duty must be the natural (“conditio sine qua non”) and proximate cause (foreseeability) of the resulting damage. – Fault: For liability to be imposed, a director /manager must have intentionally or negligently breached his duty, i. e., the director’s /manager’s deviation from the objectively “right” behaviour can be neither excused nor justified. Fault thereby carries the notion of guilt. Unlike the other elements of breach, damage, and causation, which all must be proved by the plaintiff, fault is presumed, resulting in a shift of the burden of proof to the defendant.

93

846

See Section II.6.a) above.

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8. Selected liability and capitalization questions

Switzerland

157

Claims must be brought within five years of the claimant having acquired knowledge of 157 the damage and of the person liable for compensation and no later than ten years after the wrongful act. A shareholder’s claim, however, is barred if it is brought six months following the discharge by the shareholders meeting, or if the shareholder has consented to the discharge, or if the shareholder has acquired shares with knowledge of the discharge. But for direct damages, a shareholder can bring a derivative suit only in case of the stock corporation’s bankruptcy. The stock corporation’s creditors have similar claims in case the stock corporation has been declared bankrupt. Externally, the liability of the defendants is joint and several, whereas internally, de- 158 fendants cannot be compelled to pay more than the amount of damages attributed to their own wrongdoing by taking into consideration their degree of fault and other relevant circumstances. Under Swiss law, the liability of corporate bodies does not only extend to formal 159 corporate bodies such as board members, but additionally to other individuals who in fact operate and manage the stock corporation. The term “corporate body” (organ) is broadly construed. The liability does not, therefore, only apply to individuals registered in the commercial register, such as a board member or manager of the stock corporation but, in some instances, also to so-called “de facto organs.” De facto organs include individuals or entities making decisions that lie within the duties of formal organs as well as individuals and entities that, in fact, are running the business of the stock corporation and, as a consequence, significantly influenced its decisions. Specifically, the principal shareholders and/or its representatives who directly influence the management of the stock corporation may be subject to the director’s liability to the extent they act in a position of a de facto organ. b)

Debt-equity ratio

Swiss corporate law does not impose a debt-equity ratio on companies. However, certain 160 restrictions in the federal and cantonal tax laws led to common standards. According to federal income tax law, a Swiss company must have a reasonable capital structure with the ratio of interest bearing debt to equity not exceeding 6:1, to be calculated as per the relevant balance sheet date. This ratio works as a rule of thumb; it is based on a circular of the Federal Tax Administration that contains more detailed provisions. Specific ratios, depending on the nature of the company’s assets (x% of a certain asset type need to be covered by equity), apply to a Swiss operational company, leading, however, to approximately a similar ratio as for a finance company. If the company does not comply with the applicable debt-equity ratio, the consequences 161 are twofold. For profit tax purposes, interest paid on that part of the debt that exceeds the permitted ratio will be rejected as tax-deductible business expense. For capital tax purposes, debt which exceeds the ratio will be accounted for as taxable equity.

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847

162

Switzerland

c)

Capital loss, over-indebtedness, and postponement of bankruptcy

II. Stock corporation

162 Under the rules of the CO protecting the stated share capital, the board of directors must call without delay an extraordinary shareholders’ meeting if the last annual financial statements94 show that more than 50 % of the share capital has been lost (i. e., the assets no longer cover at least 50 % of the share capital and the general reserves). 95 In such meeting, the board of directors is required to make proposals for a financial restructuring. Accordingly, the shareholders must resolve appropriate financial reorganization measures to remedy the situation. 163 Various measures – which must positively affect the ratio between the stock corporation’s net assets and equity – can be taken to remedy a capital loss (or an over-indebtedness situation as described below): – dissolution of general reserves and set-off against balance sheet loss; – re-evaluation of real property and holding in other companies up to their real values; – realization of hidden reserves96 by sale of assets above book value; – reduction of share capital;97 – increase of share capital;98 – reduction of share capital followed by immediate re-increase;99 and – reduction of liabilities (by waiver of claims). 164 Provided the share capital has been lost in full (i. e., the stock corporation’s liabilities exceed its assets), the stock corporation is considered over-indebted. In case of a substantiated concern of over-indebtedness, an interim balance sheet must be prepared at going-concern and liquidation values and submitted to the auditors for review. Should over-indebtedness be confirmed, the board of directors is required to notify the com-

94

95

96 97

98

99

848

Unless there is substantiated concern of over-indebtedness, an evaluation of the stock corporation’s financial situation may be made on the basis of the last audited balance sheet (prepared at going-concern values). Under-capitalization, i. e., if the net assets no longer exceed the equity, is distinguished from capital loss. However, the CO does not address under-capitalization. See Section II.9.b) and Section II.10.a) below. The share capital reduced can be set off against accumulated balance sheet loss. The possible amount of capital reduction is subject to the minimum share capital requirement. See Section II.2.a) and Section II.5.c)bb) above. The share capital increase creates new assets to cover the capital loss. In the case of a limited liability company, the maximum stated capital must not exceed CHF 2,000,000. See Section III.1 below. A possibility is the conversion of debt into equity (debt-equity swap); its legal admissibility in a restructuring scenario is, however, disputed. Another possibility for providing the stock corporation with new equity – without increasing the share capital – are cash injections. In cases of financial reorganization, this combination is commonly applied in Switzerland as it not only eliminates the stock corporation’s accumulated loss to the extent of the amount of reduction (by set-off) but also provides the stock corporation with new liquidity.

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9. Accounting

Switzerland

165

petent court thereof,100 unless creditors of the stock corporation subordinate their claims to those of all other company creditors in an amount sufficient to remedy the over-indebtedness.101 Upon being notified, the court must adjudicate the stock corporation’s bankruptcy. At 165 the request of the board of directors or a creditor, the court may postpone this adjudication, if there is a prospect of a financial reorganization; in this case, the court shall take the appropriate measures to preserve the value of the assets. The court may then appoint an administrator and either deprive the board of directors of its power to dispose, or make its decision subject to the administrator’s approval.102

9.

Accounting

a)

Bookkeeping

Art. 957 CO stipulates the general bookkeeping requirement affecting all forms of 166 business organization. Every business entity registered in the commercial register103 is required to keep the necessary books of account, according to the type and scope of its business, to properly reflect its financial state, and to determine the liabilities and claims and the operating results of each year. The accounts must be kept in an orderly fashion and allow for identification of business assets, receivables, and payables arising from business operations as well as profits and losses in each business year. At a minimum, periodic (i. e., annual) balance sheets and income statements must be prepared. As demanded by the size and nature of the business, the accounting system may necessitate, in addition, the following: inventory, journal, summary and ancillary books of accounting (general and subsidiary ledgers) as well as cost accounting and calculation system (to value work in progress and finished goods periodically). The income statement and the balance sheet must be signed by the individuals responsible for the management and by the personally liable partners of the company, if any. The books of account, the accounting documents, and the business correspondence must be retained for a period of ten years.

100

101

102 103

According to a case decided by the Federal Supreme Court, the board of directors may first examine the possibility of a restructuring and wait for the notification of the judge, provided there exists a genuine and specific chance for the restructuring of the stock corporation (BGE 116 II 533, 540 s.). However, this judicial exception to the statutory text of Art. 725 para. 2 CO is to be interpreted narrowly. It is fairly common in Switzerland that either shareholders or persons or entities closely related to the stock corporation, which extended loans to the company, subordinate their claims in favor of all third party creditors. Subordination of debt, however, does not eliminate overindebtedness. See Section II.12.d) below. Any commercial business with annual gross revenues exceeding CHF 100,000 must be registered in the commercial register and must keep books of account.

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849

167

Switzerland

b)

Accounting principles

II. Stock corporation

167 The accounting requirements are very general in nature. All forms of business organization are required to comply with the general rules set forth in Art. 957-964 CO. More stringent rules apply to stock corporations (Art. 662-677 CO). Art. 662a para. 2 CO sets forth the generally accepted accounting principles to be followed by stock corporations: – completeness of the annual financial statements; – clarity and materiality of the financial statements; – prudence (conservatism);104 – going concern (continuance of the stock corporation’s operations); – consistency in presentation and valuation; and – prohibition of netting assets and liabilities as well as of netting expenses and income (gross principle). 168 These accounting principles are further determined, in practice, mainly by the accounting professionals and laid down by their organization Swiss Institute of Certified Accountants which issues the non-binding but widely accepted and applied FER recommendations105 and which publishes the comprehensive Swiss Auditing Handbook. The CO and Swiss tax law require that accounts be prepared in Swiss francs106 and that they be in line with what the fiscal authorities are requiring. This may not always reflect the company’s true commercial position. Thus, the individual company accounts are mostly tax driven and disclose relatively little as they follow conservative accounting policies aimed at avoiding or reducing profit tax. 169 In general, Swiss accounting rules are less standardized than some of their foreign counterparts (such as IAS / IFRS or US GAAP). An unusual and, in fact, unique feature of Swiss accounting law is the freedom to create and to hold secret, undisclosed – socalled hidden – reserves (i. e., off-balance-sheet reserves).107 The creation of hidden reserves is possible if it is done in the best interests of both the stock corporation and its shareholders. The creation of such reserves must be notified to the auditors, but not to the shareholders. Their existence has to be shown (in the notes to the financial statements) only when they are dissolved. So far, it has proven politically impossible to introduce the concept of true and fair view to such an extent.

104

105

106

107

850

The key principle of prudence is that assets should not be overstated while liabilities should not be understated so that equity is not overstated. FER take specifically the guidelines of the OECD, the EU directives and the IAS / IFRS into consideration. As regards branches of foreign companies, the tax authorities accept that the financial statements are expressed in a foreign currency. Hidden reserves are created either by understating assets (e. g., inventories or receivables) or by overstating liabilities (e. g., provisions or accrued liabilities).

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9. Accounting

c)

Switzerland

170

Annual financial statements

The board of directors is required to prepare an annual business report. The business 170 report consists of the annual financial statements, the annual report, and the consolidated financial statements if statutorily required.108 The annual financial statements (income, i. e., profit and loss, statement and balance 171 sheet with prior year comparisons and explanatory notes on the accounts) must be prepared according to generally accepted accounting principles. They must be complete, clear, and easily understood. Therefore, the financial statements can be prepared according to all internationally accepted standards (such IAS / IFRS or US GAAP). For stock corporations, there are detailed rules as to the structure of the financial statements. The annual report rendered by the board of directors must discuss the course of business 172 as well as the financial condition of the stock corporation. In particular, it must enumerate the capital increases carried out during the business year. Usually, the report is very short and merely repeats the facts and figures derived from the financial statements. The financial statements as well as the report of the board of directors and the auditors’ 173 report must be sent to the shareholders or made available to them at least 20 days before the annual shareholders’ meeting that must be held not later than six months after the balance sheet date. The meeting is then expected to approve the financial statements and the board of directors’ report.109 If no financial statements are made available in a timely fashion, the auditors are 174 required to remind the board of directors. If the board of directors has still not submitted the financial statements, the auditors must call a shareholders’ meeting to inform them about the illegality of the board of director’s omission. The auditors will ask a notary public to attend as well to potentially witness that no shareholder has come to the meeting. In such a case, the auditors will resign at the meeting and will communicate their resignation to the board of directors, the commercial registry, and to the competent court if there is a risk of bankruptcy. The court may then decide on the next steps. d)

Disclosure of financial statements

The publication of financial statements in Switzerland is very restricted. Only compa- 175 nies with shares listed on a stock exchange or with bonds outstanding must publish their annual and consolidated (if any) financial statements. Such publication must be made either by publication in the SOGC or by sending a copy to every person requesting such information, at this person’s own expense, and do so within one year of formal approval by the shareholders’ meeting. The deadline is six months after the balance sheet date, for most companies, taking the calendar year as their business year, June 30. 108 109

See Section II.9.e) below. See Section II.3.b) above.

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176

Switzerland

II. Stock corporation

176 The SESTL and the SWX Listing Rules contain further disclosure and related obligations. Banks, insurance companies, and mutual investment funds – which are subject to strict supervision – are required to file their accounts with the regulatory authorities. In addition, the banks and insurance companies must publish their balance sheets – annually, semi-annually or quarterly, depending on the size of the company – in the SOGC and such other newspapers as their articles of incorporation may require. 177 Stock corporations with shares listed on a stock exchange also must disclose, in the notes to the financial statements, the names of important shareholders, i. e., shareholders or organized groups of shareholders with legal ownership or beneficial interest of more than 5% of the voting rights of such stock corporation and their stake.110 Unlisted stock corporations do not have to disclose the identity of their shareholders to the public at large. 178 All other companies must disclose their annual financial statements, consolidated statements (if any), and the auditors’ reports only to their shareholders and to their creditors who assert a legitimate inspection interest. If the company refuses to disclose this information, the petitioner may seek a judicial order for disclosure. In practice, the company can avoid a creditor’s inspection by settling the amount outstanding. e)

Consolidation

179 The annual financial statements of individual companies must be consolidated in the group account, provided two of the following thresholds are exceeded in two consecutive business years: balance sheet total of CHF 10,000,000, aggregate turnover of CHF 20,000,000, and 200 employees on an yearly average. Consolidated accounts still need to be prepared if the company has bonds outstanding, the company’s shares are listed on a stock exchange, shareholders with a stake of at least 10 % are requesting them, or if it is necessary to gain a picture of the financial situation and the results of the company’s operations that is as reliable as possible. 180 The consolidated accounts are subject to the generally accepted accounting principles. However, the CO lacks specific consolidation principles. FER provides a set of applicable minimal standards. Unlike with respect to the individual accounts, the consolidation and valuation principles applied must be disclosed only in the notes to the consolidated financial statements. 181 Consolidated accounts are not used for profit distribution because dividends can only be paid out of the current profits and available reserves shown in the individual accounts of the holding company. Furthermore, consolidated accounts are not relevant for tax purposes as it is not possible under Swiss tax law to offset the profits of one subsidiary against the losses of another in the same country through a consolidated tax return.

110

852

If the articles of incorporation provide for a lower percentage limit for holding registered shares, this lower threshold applies.

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9. Accounting

f)

Switzerland

182

Audit requirements

The founders’ meeting of every stock corporation must elect one or more auditors.111 182 These auditors may be individuals or companies (audit firms). At least one auditor must be domiciled or have a business establishment in Switzerland. The names of the auditors need to be recorded by the stock corporations in the commercial register. The auditors’ maximum term as set forth in the CO is three years. In practice, the auditors are elected for a term of one year and need to be re-elected at each annual shareholders’ meeting. To be eligible, the auditors must satisfy the qualifications and independence112 necessary 183 to perform their duties. In certain cases,113 the auditors must be especially qualified, i. e., meet additional professional standards that, to a greater or lesser extent, correspond to the standards set forth in the 8th EU Company Law Directive. Especially qualified auditors can be either individual accountants or auditing companies of domestic or foreign origin. (Especially qualified) auditors are not required to be licensed to carry out their professional activity,114 except with respect to the auditing of banks, securities dealers, and investment funds. According to the specific statutory provisions in the relevant area, auditing firms must meet certain specific conditions to be approved as auditors by the FBC. The auditors must audit the annual financial statements (i. e., the balance sheet, the 184 income statement and the notes on the accounts) of a stock corporation115 but not the report of the board of directors. The audit includes the examination of the bookkeeping and the annual accounts as well as the appropriation of retained earnings proposed by the board of directors to comply with applicable law and the stock corporation’s articles of incorporation. The auditors are required to prepare a written report on their audit directed to the shareholders’ meeting; the report can have the following recommendations with respect to the annual accounts: approval without qualification, approval with qualification, and rejection. The auditing of consolidated accounts is reserved for especially qualified auditors. They 185 are required to confirm that the consolidated accounts are lawful and that the consolidation and valuation principles as disclosed in the notes thereto are actually applied. 111 112

113

114 115

On the other hand, the shareholders’ meeting may, at any time, dismiss the auditors. According to Art. 727c CO, the auditors must be independent from the board of directors and from any shareholder with a majority vote. Specifically, they must not be employees of the stock corporation to be audited, and they must not take on work for any company that is incompatible with the audit mandate. Furthermore, the auditors must be independent from companies belonging to the same group of companies if a shareholder or a creditor so requests. The auditors must be especially qualified if the company has bonds outstanding, its shares are listed on a stock exchange, or two of the following thresholds are exceeded in two consecutive years: balance sheet total of CHF 20,000,000, aggregate revenues of CHF 40,000,000, and 200 employees on an yearly average. However, a new law is expected to change this. See Section II.9.h) below. Currently, only stock corporations are under a legal requirement to be audited. Regarding limited liability companies, see Section III.8.f) and Section III.12 below.

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The abbreviated written report is directed to the shareholders’ meeting which is expected to approve the consolidated accounts. g)

Setting up of reserves

186 The CO requires stock corporations to appropriate 5% of their annual net profit to the general reserves until they amount to 20 % of the paid-in share capital.116 In addition, the following items must be appropriated to the general reserves even if they exceed 20 % of the paid-in share capital: – 10 % of the amount distributed from net profits after deduction of the appropriation mentioned above and the payment of a 5% dividend to the shareholders; – with respect to the issue of shares: the agio, i. e., the paid-in share capital exceeding its par value; and – any amount paid for shares cancelled. 187 As long as the general reserves do not exceed 50 % of the share capital, they may be used only to cover losses or to help the stock corporation preserve periods of depressed business, or counter unemployment, or mitigate its consequences.117 188 Furthermore, appropriate reserves must be taken for any write-ups of real property and investments as well as for the stock corporation’s own shares;118 their liquidation is subject to special provisions. h)

New federal law on admission and supervision of auditors

189 In June 2004, the Federal Council presented the draft of a new federal law on the admission and supervision of auditors, together with a proposed revision of the CO’s audit provisions. These provisions are not expected to enter into force before 2006. 190 The draft aims at ensuring high quality auditing of financial statements of companies. The auditors’ tasks for listed and other economically important companies are described in more detail. The know-how and quality requirements for the auditors are statutorily specified for the first time. The auditors’ independence is now regulated more strictly to avoid conflicts of interest and as a part of the overall corporate governance legal framework. 191 The new legislation requires a company to have an ordinary audit in the following circumstances:

116

117 118

854

The articles of incorporation may provide that more than – the statutorily required – 5% of the annual net profit shall be appropriated to the general reserves and/or that appropriations may be made exceeding – the statutorily required – 20 % of the paid-in share capital. See also Section II.3.a)a) above. This rule and the 10 % appropriation rule do not apply to holding companies. See Section II.4.c) above.

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– the shares are listed on a stock exchange or it has bonds outstanding; – it exceeds two of the following thresholds in two consecutive years: balance sheet total of CHF 6,000,000, aggregate revenues of CHF 12,000,000, and 50 full time employees on an yearly average; or – it is required to prepare consolidated financial statements.119 For small and medium size companies, i. e., companies not satisfying the requirements 192 for an ordinary audit as set forth in the preceding paragraph, only a limited audit is demanded; this to be conducted by admitted auditors who do not need to have the same level of accounting experience as the auditors of bigger companies. Small companies with less than ten full time employees on an yearly average may opt out of the auditing requirement, provided all their shareholders resolve to do so. These steps are in line with corresponding EU law. The draft provides for the establishment of a governmental supervision authority that 193 ensures with an admission system that only qualified auditors may render auditing services. The new admission and supervision system is based on a fundamental accord between the United States and the EU. It is expected to facilitate the work of Swiss auditors practicing abroad who are, in the United States, subject to the supervision of the Public Company Accounting Oversight Board. The draft only requires that the auditors of small and medium size companies be admitted by the governmental authority. However, other than the auditors of listed and other economically important companies, they will not be supervised.

10. Taxation The Swiss federal structure strongly influences the country’s tax system: each Canton 194 has its own tax laws. Tariffs, tax rates as well as exemptions remain within the competence of each Canton. Therefore, the choice of residence can be an important element in tax planning when deciding where a particular business entity is going to be established within Switzerland. The two principal levels of tax authorities are the federal authorities in Bern and the 195 cantonal /municipal authorities. Federal authorities administer withholding tax on dividends, interest and other payments, stamp duty and value added tax whereas the cantonal authorities assess and collect cantonal and municipal profit /income and capital /net worth taxes as well as the federal profit /income taxes. a)

Direct taxation of companies and branches

The Swiss Federation levies direct federal profit tax at a flat rate of 8.5% on profits after 196 tax.120 In addition, each Canton levies profit taxes at the cantonal and the municipal 119 120

See Section II.9.e) above. For purposes of both federal and cantonal income tax, losses of prior years can be carried forward for a period of seven years.

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level at different rates. Accordingly, the tax burden of profit /income and capital varies from Canton to Canton and from Municipality to Municipality. Cantonal and municipal taxes are generally imposed at progressive rates.121 As a rule, the maximum aggregate effective profit tax rate for federal, cantonal, and municipal taxes is in the range of 14% and 30 %, depending on the company’s corporate residence.122 197 Only Cantons123 levy a capital tax, which is based on the company’s net worth (capital and reserves). The tax rates vary from 0.67‰ to 7.4‰. Taxes on profit /income and capital paid by companies are deductible for federal and cantonal profit tax purposes. 198 As a rule, foreign controlled companies operating in Switzerland are taxed in the same way as Swiss domestic companies. Subject to special allocation rules, non-resident companies with a Swiss branch are subject to tax on both the profit and the capital of the branch as resident companies.124 199 The direct tax assessment looks at the net profits and the net equity as set out in the statutory financial statements that are prepared by the company’s management in accordance with Swiss generally accepted accounting principles, audited by the auditors, and approved by the shareholders’ meeting.125 Tax authorities may adjust the statutory financial statements to the extent transactions are not commercially justified or are not at arm’s length. According to the arm’s length principle, transactions between related parties are to be conducted according to the same terms and conditions as they would be between unrelated parties. No specific rules have been enacted to implement this principle in Swiss tax law, but it is widely applied by the tax authorities. b)

Direct taxation of individuals

200 As a rule, individuals residing in Switzerland126 are subject to federal, cantonal, and municipal taxes on their worldwide income from all sources. While the treatment of exemptions, allowances, and personal deductions may vary, the federal and most of the cantonal tax laws follow the same general principles in determining the gross income, applying an all-inclusive approach (“all recurring and non-recurring income shall be 121

122

123 124

125

126

856

The progression is a function of the yield earned by the company, with fixed minimum and maximum rates. A company is considered resident if its place of incorporation as set out in its articles of incorporation, is Switzerland, or its business activities are directed from Switzerland. The federal capital tax was abolished as of January 1, 1998. The rate applied to the branch’s profits will vary depending on whether the tax is assessed on its profit and capital, or on a portion of the worldwide profit and capital of the head office. No withholding tax is levied on the distribution of profits from a Swiss branch to its head office abroad. The working capital of the branch is not subject to the federal stamp duty. Accordingly, the statutory financial statements must not be substituted by special tax accounts. See Section II.9.b) above. Individuals are considered a resident of Zurich if they take up legal residence for a minimum period of 30 days if they pursue gainful employment, or for a minimum period of 90 days if they do not.

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subject to income tax”.) As a rule, namely the following types of income are subject to taxation: earned income (such as employment income or income derived from the operation of a business), compensatory income (such as pensions and other retirement income or disability payments), income derived from immovable property, and income of movable property (such as interests, dividends, or royalties). By contrast, capital gains realised by individuals on moveable property (e. g., capital gains derived from the purchase and sale of shares) are generally not taxed, provided these moveable assets are not deemed business assets. Expenses as incurred in realizing the income (incomeconnected expenses) and allowances as statutorily fixed may be deducted from the gross income. The maximum rate of federal income tax is 11.5%; the cantonal rates vary and range between approx. 12% and 35%. Individuals domiciled or resident outside Switzerland, who have a significant economic 201 connection to the country, have a limited tax obligation if they have a stake in a business operation in Switzerland, maintain a permanent establishment of business in Switzerland, have a legal or beneficial ownership in immovable property located in Switzerland, or if they are engaged in the sale or brokerage of Swiss immovable property. These individuals must pay income tax only on the income derived from the sources giving rise to the limited tax obligation. The net worth of individuals resident in Switzerland is taxed on the cantonal and 202 municipal level – but not on the federal level – at the fair market value of the aggregate taxable assets (including almost every category of assets held by individuals) minus liabilities (such as mortgages and personal loans) and statutorily prescribed deductions depending on the personal /civil status of the taxpayer (married, divorced, with children, etc.). In most Cantons, the tax rates are progressive. They range from 1.3‰ to 5.88‰.127 Taxpayers with a limited tax obligation are required to pay the net worth tax on immovable property and on the assets belonging to a permanent establishment of business within the relevant Canton. c)

Tax exemption and relief

Under the Swiss tax system, corporate income is subject to a double burden as the 203 company is charged profit tax on its profits, and the company’s corporate shareholders are profit taxed separately on the dividends received out of the same profits. To avoid multiple taxation, a system of participation exemption is in place at both the cantonal and federal level for holding companies, and also for operating companies, that derive dividends and capital gains from qualifying participations (participations represent at least 20 % of the company’s assets or have a value of at least CHF 2,000,000). Holding companies, i. e., companies holding substantial investments in the capital of 204 other companies (at least two thirds of assets consist of participations in other companies) or whose income is essentially composed of dividend income (at least two thirds of 127

Swiss average for a married individual without children with a net worth of CHF 150,000 and of CHF 5,000,000 as per the report of the Federal Tax Administration “Steuerbelastung in der Schweiz 2003 – Kantonshauptorte, Kantonsziffern”.

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income consists of dividends), may in most instances be fully exempt from cantonal and municipal income taxes (holding privilege). 205 Significant relief of cantonal and municipal profit /income taxes may be obtained by companies not performing business activities in Switzerland or for other special purpose companies such as research, management or auxiliary companies. 206 Foreign citizens without employment or business activity in Switzerland may be taxed on a money-spent-basis (lump-sum taxation). d)

Tax incentives

207 Most Cantons offer various incentives for newly established companies and/or for expansion investments such as financial grants, favorable credit facilities, and real property. All Cantons offer tax holidays or significant tax relief for cantonal and municipal tax purposes for up to ten years to attract foreign investors and encourage start-up companies. In practice, tailor-made agreements with potential investors are concluded with the cantonal authorities. e)

Indirect taxes

aa)

Federal value added tax

208 Proceeds of sales and services effected in Switzerland are subject to the federal value added tax at the standard rate of currently 7.6%. As a rule, the registered taxpayer is entitled to offset, against the value added tax payable, the amount of the tax charges by suppliers or paid on imports. The assessment system is, to a large extent, similar to those in place in the EU. As a rule, business entities are required to register as VAT taxpayers if their total annual taxable turnover subject to VAT exceeds CHF 75,000.128 bb) Federal withholding tax

209 Distributions of companies resident in Switzerland, i. e., dividends – whether distributed formally or hidden – and liquidation surplus, are subject to federal withholding tax at the rate of 35%.129 The tax must be withheld by the paying company from the amount distributed to the recipient. Swiss recipients may fully recover this withholding tax whereas recipients residing abroad may, in full or in part, obtain reimbursement under any relevant tax treaty, if such exists. 210 As a rule, any repurchase of its own shares (treasury stock)130 by a stock corporation is treated as a partial liquidation for purposes of Swiss withholding tax. The repurchase of its own shares up to the limits of 10 % or 20 % (in connection with a transfer restriction of registered shares), however, does not trigger any withholding tax, provided the relevant shares are sold within a period of six years from the date of acquisition. A 128 129

130

858

See Section II.2.b)bb) above. In addition, interest on bank accounts (or the like) and bonds are subject to federal withholding tax. There is no withholding tax on royalties. See Section II.4.c) above.

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stock corporation’s own shares held for more than six years will be deemed cancelled as part of a partial liquidation giving rise to withholding tax at the rate of 35%. The repurchase of its own shares in excess of the limits of 10% or 20 % respectively will be treated at once as a partial liquidation of the stock corporation giving rise to withholding tax at the rate of 35%. cc)

Federal stamp duty

Federal stamp duty is levied on (i) issues and increases of share capital, issues of bonds, 211 and money market papers; and (ii) transactions in Swiss and foreign securities effected by registered securities dealers and others treated as such (banks, brokers and certain other companies). The consideration received by a company for the issue of shares, i. e., newly created 212 nominal capital, whether on incorporation or on share capital increase, is the basis for the federal stamp duty of 1% which has to be paid by the company. No stamp duty is due on the first CHF 250,000 of nominal capital.131 New nominal capital created in the course of a qualifying corporate reorganization (statutory mergers, merger-like transactions, and corporate divisions) is under certain conditions tax exempt. For issued bonds, a stamp duty of 0.12% is levied for each year of maturity, capped at 1.2%. Issued money market papers are taxed at 0.06% p. a. Federal stamp transfer tax applies if taxable securities are transferred for a consideration, 213 provided a registered securities dealer in Switzerland is involved, either as an intermediary or as a party to the transaction. The tax is levied on the consideration payable for the transfer of the security. The rate is 0.15% on the transfer of Swiss securities and 0.3% on the transfer of non-Swiss securities.

11. Dissolution and liquidation At an extraordinary shareholders’ meeting, a majority of the shareholders of the com- 214 pany may resolve to dissolve132 and liquidate the stock corporation and elect a liquidator (or several liquidators) – which may be either a board member or another individual elected by the shareholders’ meeting – as the liquidator(s) of the stock corporation. At least one liquidator must be domiciled in Switzerland and must be authorized to represent the stock corporation in liquidation. In addition, the board members of the stock corporation may resign, and the shareholders’ meeting may discharge them from their liability.

131 132

See Section II.2.e)aa) above. The stock corporation may be dissolved as follows: in accordance with the articles of incorporation; by resolution of the shareholders’ meeting made in the form of a notarized deed; by adjudication of bankruptcy; by decision of the judge, if shareholders representing together at least 10 % of the share capital request dissolution for important reasons (instead of dissolution, the judge may decide on another solution appropriate in the circumstances and acceptable to the interested parties); and in all other cases provided for by law.

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215 The resolutions must be recorded by a notary public in a public deed and registered with the commercial register. Upon registration, the term “in Liquidation” (“en liquidation”, “in liquidazione”) will be added to the corporate name of the stock corporation. 216 Upon assuming office, the liquidator is required to prepare a liquidation opening balance sheet for the stock corporation as of the date of the shareholders’ meeting that resolved to dissolve and liquidate the stock corporation. Both the assets and liabilities must be appraised at liquidation values. It is recommended to have the balance sheet reviewed by the stock corporation’s auditors and approved by the shareholders. 217 Obligees reflected in the books of the stock corporation, or known in any other way, will then be informed of the dissolution of the stock corporation by special notice and requested to file their claims. Unknown obligees and obligees whose domiciles are not known are to be notified and requested by publication in the SOGC. The call for the filing of claims must be published three times therein. 218 If the liquidation process lasts for an extended period, the liquidator is required to prepare interim balance sheets. 219 The liquidator is required to file tax declarations for the stock corporation in liquidation with the competent federal and cantonal tax authorities. 220 As soon as all liabilities of the stock corporation are satisfied, and the assets of the stock corporation liquidated, the liquidator is required to prepare the liquidation closing accounts, which must be reviewed by the stock corporation’s auditors. 221 In the event that the stock corporation is over-indebted, i. e., the stock corporation’s liabilities exceed its assets, the liquidator is required to notify the competent judge thereof; the judge would then declare the stock corporation bankrupt and open bankruptcy proceedings. 222 Generally, the distribution of the net assets to the shareholders may be effected at the earliest upon expiration of a period of one year from the day the notice to the creditors has been published for the third time in the SOGC. Nevertheless, a distribution may already be made after a three month period if an especially qualified auditor confirms that the liabilities of the stock corporation have been discharged and that, under the given circumstances, third party interests are not jeopardized by reducing the waiting period. 223 After winding up the stock corporation, an extraordinary shareholders’ meeting resolves to approve the liquidation closing accounts and the distribution of the liquidation surplus, if any, and receives the liquidator’s final report and the auditors’ report. Further, the shareholders’ meeting will normally discharge the liquidator (and the board members, provided this has not taken place earlier on). 224 Following the distribution of a liquidation surplus, if any, after the expiration of the one year period, or on the basis of the especially qualified auditors’ confirmation, the 860

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liquidator applies for the deletion of the stock corporation from the commercial register. Prior to deleting the stock corporation from the commercial register, the commercial registry will seek the confirmation of the tax authorities that all taxes have been paid by the stock corporation. With the deletion of the stock corporation from the commercial register, the stock corporation ceases to exist as a corporate entity. The books of the stock corporation shall then be preserved for ten years in a safe place to be designated by the liquidator.

12. Insolvency, debt enforcement, moratorium, and bankruptcy a)

Insolvency

The information, whether a Swiss entity is insolvent in the sense of unable to pay its 225 debts when due, is not information publicly available. As in other jurisdictions, there are private firms in Switzerland providing for credit information. The debt enforcement offices keep registers where the opening of enforcement proce- 226 dures regarding money claims against a debtor are kept publicly available (Betreibungsregister, registre de l’office des poursuites, registro dell’ufficio d’esecuzione). These are of limited use, as it is quite easy (and inexpensive) to open enforcement procedures against a Swiss debtor. It may well be, therefore, that the debtor has a number of entries in the register due to the fact that – albeit he is perfectly solvent – he is contesting the claim as such, for important reasons. On the other hand, a debtor that shows no entries may still face huge claims bringing him to the brink of insolvency. If these claims are not yet being enforced by way of legal steps (for example due to moratorium negotiations going on with creditors) they are not reflected in the register. Further, the time gap between the actual events and the entries shown in the register may extend to several days or even weeks in some Cantons. The declaration of bankruptcy (Konkurs, faillite, fallimento) and the granting of a mor- 227 atorium (Nachlassstundung, sursis provisoire, moratoria provvisoria) are both published in the SOGC. To check whether bankruptcy has been declared over an entity, the SOGC may, therefore, be consulted. The formal declaration of bankruptcy or the granting of a moratorium may have immediate effects at the very moment the judge hands down the decision, whereas the publication may occur several days later. Further, an entity that is at the brink of insolvency and/or over-indebtedness may file a motion with the competent bankruptcy judge that the declaration of bankruptcy be stayed (Konkursaufschub, ajournement de faillite, differimento della dichiarazione di fallimento) in order for it to allow for settlement talks with its main creditors.133 The granting of such a motion may not be published in order not to put a possible restructuring at risk because of negative publicity. Once the entity is being liquidated and dissolved, because of the bankruptcy or another 228 insolvency event, this can also be seen from the commercial register extract. 133

See Section II.8.c) above.

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Switzerland

b)

Debt enforcement

II. Stock corporation

229 Most debt enforcement proceedings initiated by a creditor begin with the creditor’s request for debt enforcement (Betreibungsbegehren, requisition de poursuite, domanda d’esecuzione) to be filed with the competent debt enforcement office at the debtors’ domicile, registered seat (for registered companies), or principal place of business (for unregistered companies).134 The debt enforcement office then issues, without any further preliminary examination procedure, a payment order (Zahlungsbefehl, commandement de payer, precetto esecutivo) to the debtor, instructing the latter to pay the claimed amount within 20 days or, alternatively, to declare opposition (Rechtsvorschlag, opposition, opposizione) against the payment order within ten days from the receipt of the payment order. If the debtor has declared opposition, the creditor must eliminate this opposition to continue the execution proceedings. This can be done by instituting an ordinary court action or by a removal order (Rechtso¨ffnung, mainleve´e, mediante rigetto) in summary proceedings. If the removal order can be based on an enforceable judgment rendered by a Swiss or foreign court or an equivalent court order, the debtor’s opposition is definitely removed (definitive Rechtso¨ffnung, mainleve´e de´finitive, mediante rigetto definitivo), without further recourse. If the creditor has not (yet) obtained such judgment or court order, but is in possession of a written acknowledgment of debt signed by the debtor, the creditor can move for a provisional removal of the debtor’s opposition (provisorische Rechtso¨ffnung, mainleve´e provisoire, mediante rigetto provvisorio). However, if the judge grants the creditor’s motion for a provisional removal of the debtor’s opposition, the debtor can still stop further enforcement proceedings by filing an action for a (negative) declaratory judgment (Aberkennungsklage, action en libe´ration de dette, disconoscimento del debito) that the creditor has no claim against him within 20 days of the removal order. 230 If the debtor has failed to declare opposition, or if he has done so, but his opposition has ultimately been removed by the creditor, the creditor may file a request for the continuation of the debt enforcement proceedings (Fortsetzungsbegehren, requisition de continuer la poursuite, domanda di continuazione). At this point, the proceedings continue differently: – If the claim, for which execution is sought, is secured by pledge or mortgage, the debtor is subject to proceedings aiming at the realization of the security (Betreibung auf Pfandverwertung, poursuite en re´alisation de gages, esecuzione in via di realizzazione del pegno). – If the debtor is one of the legal entities or individuals registered in the commercial register (such as stock corporations and limited liability companies), which is explicitly listed by the Swiss Code of Debt Enforcement and Bankruptcy (CDEB), the debtor is subject to the institution of bankruptcy proceedings (Konkursbetreibung, poursuite par voie de faillite, esecuzione in via di fallimento). – In any other case, the debtor is subject to proceedings aiming at the seizure and subsequent execution of specific assets (Betreibung auf Pfa¨ndung, poursuite par voie de saisie, esecuzione in via di pignoramento). 134

862

The request must name the creditor and the debtor, specify the amount and interest requested, and indicate the alleged claim’s basis.

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c)

Switzerland

231

Moratorium

If a debtor applies for creditor protection, the court may take any necessary preliminary 231 measures. In particular, a provisional moratorium of up to two months may be granted and a provisional administrator may be appointed by the court. A temporary moratorium will be published and, in most respects, has the same effects as a definite moratorium as discussed below. The beginning and duration of the moratorium will be published, notified to the debt enforcement office and, when applicable, registered in the real estate register. The moratorium takes effect immediately, however, upon the court’s decision and not at the later time of publication. The effects of the moratorium are: 232 – The court will appoint an administrator. – No debt enforcement proceedings can be initiated for the duration of the moratorium, and pending proceedings are stayed. Procedural steps taken before the moratorium, however, remain in effect until a decision is taken on a composition agreement. The following are excluded from the stay of debt enforcement proceedings: (i) enforcement proceedings for claims of employees arising in the last six months and certain claims based on social security laws and family law; (ii) enforcement proceedings for debt secured by real property; (iii) enforcement proceedings for new debt arising out of the permitted continuation of the debtor’s business. – The moratorium does not preclude initiating lawsuits and continuing pending litigations. – The moratorium does not affect the agreed upon due dates of debts. – The debtor’s power both to dispose of its assets and its power to manage the company’s affairs are restricted for the duration of the moratorium. However, the debtor is only barred from effecting certain transactions. In all other respects, the debtor may – under the supervision of the administrator – freely dispose of its assets, as long as any instructions of the administrator and/or court are observed. If the court finds it appropriate, however, it may take the management, in part or in its entirety, out of the debtor’s hands and entrust the administrator with it. – Contracts between the debtor and other parties are in full effect, unless provided otherwise in the contract. The moratorium does not trigger a general right of the other party to terminate the contract. d)

Bankruptcy

Upon a creditor’s request, a debtor subject to bankruptcy proceedings is notified and 233 threatened with bankruptcy. Thereafter, unless certain objections are sustained, the bankruptcy court will declare bankruptcy. The bankrupt estate comprises all its assets, except certain defined property deemed 234 necessary for the debtor’s livelihood and the continuation of his professional activities. By virtue of the bankruptcy decree, all claims against the debtor, including non-monetary debts (which are converted into monetary debts) become due, except for claims secured by mortgages on the debtor’s real property. On the other hand, the decree Adrian Drig

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blocks all other debt enforcement proceedings against the same debtor, and no new proceedings can be instituted by creditors for claims that have arisen prior to the decree. Such creditor will, however, participate in the bankruptcy proceedings. 235 In an ordinary proceeding,135 the bankruptcy office draws up an inventory and publishes a notice of bankruptcy, ordering all creditors and debtors to file their claims and debts. The bankrupt estate is administered by the bankruptcy office, or if elected by the creditors, elected persons acting as bankruptcy administrators. The bankruptcy office or elected bankruptcy administrators must examine the creditors and, based on its findings, draw up a schedule of claims (Kollokationsplan, e´tat de collocation, graduatoria), listing all creditors with their specific claims and privileges, if any.136 Thereafter, a 135

136

864

Summary bankruptcy proceedings may be ordered by the bankruptcy court, if it is unlikely that the debtor’s assets will cover the costs of the ordinary bankruptcy proceedings. Unless a creditor requests and advances the costs for the ordinary proceedings, the bankruptcy office then proceeds to the liquidation of the debtor’s estate without the participation of the creditors. The creditors receive a certificate of loss for their uncovered claims. If the debtor’s assets are not likely to even cover the costs of a summary bankruptcy proceeding, the bankruptcy court will order the bankruptcy proceeding closed (closure for lack of assets). The creditors will not receive a certificate of loss; however, the creditors can initiate new debt enforcement proceedings against the same debtor to seize specific property of the debtor. Claims secured by a collateral generally get paid out first. This holds true for all claims secured by moveable goods given in pledge. Mortgage-backed securities, however, are only liquidated and paid out to the creditors, whose claims against the debtor are due; claims secured by mortgages that are not yet due are assigned to the acquirer of the real property. Should the proceeds resulting from the liquidation of the collateral (moveable goods or real property) exceed the creditor’s secured claim, the surplus is made available for subsequent distribution to the creditors of non-secured claims. If, conversely, the proceeds are not sufficient to cover the claims of a secured creditor, such creditor concurs with the unsecured creditors for the outstanding amount of his claim. According to Art. 219 CDEB, three classes of creditor’s claims can be distinguished. Each class takes precedence over the next lower class inasmuch as the proceeds, resulting from the liquidation of the debtor’s assets, are first used to completely cover the “privileged” claims of a higher class; only the remaining proceeds are then given to the next, lower class, and are distributed among the creditors belonging to this class. The “ordinary” creditors of the third (and last) class get paid out last; normally, those creditors suffer substantial losses on their claims. Privileged in the first class are claims of the former employees of the debtor, in particular, the claims for the salary that have come into existence six months prior to the declaration of bankruptcy of the employer-debtor. Further, claims for family support (for the last six months prior to the declaration of bankruptcy), claims of policyholders against the debtor-casualty insurers, and claims of the old age and retirement fund against the employer-debtor are privileged in the first class. Privileged in the second class are claims of the children against their parents for the children’s funds entrusted to the parents, provided that bankruptcy has been declared during the parent’s management of the funds or at the most one year after such management has ended. All other “ordinary” claims are qualified as third class claims; creditors for such claims get paid only after all the privileged claims have been fully covered.

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Switzerland

236

(second) meeting of the creditors will convene to pass resolutions on all important matters, including the pursuit of claims against third parties (e. g., directors or officers of the debtor) and the realization of the bankrupt estate’s assets. After the realization of such assets, the bankruptcy administration proceeds to the distribution of the proceeds to the creditors, according to the claim schedule. Afterwards, a final report and account are filed with the bankruptcy court which then will declare the bankruptcy closed. The creditors receive a certificate of loss (Verlustschein, acte de de´faut de biens, attestato di carenza di beni) for the uncovered balance of their claims. A business entity that is judged bankrupt, is by law subject to dissolution and must be 236 deleted from the commercial register; this holds even if the bankruptcy proceedings must be closed due to lack of assets. The deletion from the commercial register terminates the existence of the corporate entity subject to a declaration of bankruptcy. Accordingly, no new business venture can be pursued by this entity. However, the shareholders of the deleted entity are free to set up a new legal entity for such purposes.

13. New Merger Law and Swiss merger control scheme a)

New Federal Law on Merger, Demerger, Transformation and Transfer of Assets

The Merger Law came into force on July 1, 2004.137 It regulates the adaptation of the 237 legal structures of, inter alia, corporate entities (such as the stock corporation and the limited liability company) in connection with mergers, demergers, conversions of the legal form, and transfers of assets and liabilities. The new law aims at guaranteeing legal certainty and transparency and protecting creditors, employees as well as persons with minority ownership interests. The provisions of the Federal Law on Cartels and Other Restrictions of Competition remain unaffected by the new law.138 By way of a codification of the existing practice, supplemented by new rather detailed 238 procedural provisions, the Merger Law makes available also certain new transactional tools to facilitate reorganizations, most importantly the concept of transfer of assets and

137

138

By way of a subordination agreement, it is even possible to create a “forth” class, which is even subordinate to ordinary claims. Typically, certain types of creditors agree to subordinate their claims in connection with a financial restructuring of a company to avoid the company going into bankruptcy. This Section II.13.a) can give only a very brief overview of the Merger Law. Cf. for detailed information the most important commentaries on the Merger Law: Frank Vischer/Vischer Attorneys-at-Law (Ed.), Kommentar zum Fusionsgesetz, Zurich 2004; Rolf Watter/Nedim Peter Vogt/Rudolf Tschni/Daniel Dniker (Ed.), Fusionsgesetz, Basel 2004; Hans Caspar von der Crone/Andreas Gersbach/Franz J. Kessler/Martin Dietrich/Claudia Fritsche/Katja Berlinger, Das Fusionsgesetz, Zurich 2004; Baker & McKenzie (Ed.), Fusionsgesetz, Bern 2003; Henry Peter/Rita Trigo Trinidade (Ed.), Commentaire de la loi fdrale sur la fusion, la scission, la transformation et le transfert de patrimoine, Zurich 2004. Cf. Section II.13.b) below.

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II. Stock corporation

liabilities. The four transaction structures that are regulated in the Merger Law are the following: – Merger: A merger combines two or more companies in a manner whereby at least one initial company (absorption) or all of the initial companies (amalgamation) are dissolved. – Demerger: In a demerger, portions of the assets and liabilities are transferred (spin-off or division) to a newly formed or an existing company so that the shareholders obtain, in addition to their shares in the initial company, either a pro rata (symmetrical) or non-pro rata (assymetrical) percentage of shares in the absorbing company. – Conversion: A company changes its legal form of organization and changes its shareholders’ rights to the new legal form of organization, meanwhile the composition of its shareholder constituency remains the same. – Transfer of assets and liabilities: This transaction structure comprises the transfer by statutory law of a list of specified assets and liabilities to a transferor. The shareholders’ rights remain unaffected by such transfer. 239 As the ordinary procedures are time-consuming and rather costly, in particular with mergers and demergers, procedural simplifications are available, under certain conditions, for small and medium-sized companies and for wholly-owned companies with stated capital (i. e., stock corporations and limited liability companies). 240 Shareholders holding 10 % or less of the votes can be squeezed-out when their company merges into another, provided at least 90 % of the votes of the shareholders approve such a squeeze-out. 241 The tax provisions of the Merger Law remained by and large within the scope of the existing practice. Even before the Merger Law’s entry into force, mergers, demergers, and conversions could be conducted in a tax-neutral manner. Notwithstanding the foregoing, the Merger Law introduced certain tax law changes which further facilitate the restructuring of enterprises, such as the abolishment of the retention period in the case of spin-offs and divisions as well as enhanced possibilities for the transfer of assets and liabilities within a corporate group. In addition, certain tax obstacles have been removed and certain legal uncertainties have been eliminated. b)

Swiss merger control scheme

242 The Swiss merger control scheme requires a pre-notification of mergers if the following turnover thresholds are surpassed: – the enterprises involved in the transaction have worldwide turnover of at least CHF 2,000,000,000 combined or combined turnover in Switzerland of at least CHF 500,000,000; and – at least two of the enterprises involved in the transaction have turnover in Switzerland totaling at least CHF 100,000,000.139 139

866

Swiss competition law contains special rules for determining and calculating the relevant thresholds in specific areas, such as banking, insurance, and media.

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14. List of publications

Switzerland

243

The Federal Competition Commission (FCC) is the regulatory body responsible for 243 merger control. Once the pre-notification has been filed, the FCC decides within one month (stage 1 investigation) whether the transaction raises concerns regarding the future structure of the market (elimination of effective competition). If so, the FCC enters into a stage 2 investigation. The final decision has then to be rendered within another four months. The merger may be cleared, cleared subject to conditions, or prohibited. The test applicable is whether the concentration resulting from the merger has the potential to eliminate effective competition. In 2003, 30 mergers were notified, five of which were made subject to a stage 2 investigation. However, no merger was prohibited or cleared subject to conditions in 2003.

14. List of publications a)

On stock corporation only

– Bckli Peter, Das Schweizer Aktienrecht, 3rd edition, Zurich, 2004. – Forstmoser Peter/Mayer-Hayoz Arthur/Nobel Peter, Schweizerisches Aktienrecht, Berne 1996. – Kunz Peter V., Der Minderheitenschutz im schweizerischen Aktienrecht, Habil., Berne 2001. – Meier Robert, Die Aktiengesellschaft – Ein Rechtshandbuch fr die praktische Arbeit in der schweizerischen Aktiengesellschaft, 2nd edition, Zurich 1994. – Schenker Urs, Sanierung von Aktiengesellschaften – rechtliche und steuerliche Rahmenbedingungen, Zurich 2002. – Siegwart Alfred [et al.], Zrcher Kommentar zum Schweizerischen Zivilgesetzbuch – Das Obligationenrecht – 5. Teil: Die Aktiengesellschaft, Zurich 1945. – Vito Roberto [et al.], Sanierung der Aktiengesellschaft – Ausgewhlte Rechtsfragen fr die Unternehmenspraxis, 2nd edition, Zurich 2003. – von Bhren Roland/Stoffel Walter A./Schnyder Anton K./ Christen-Westenberg Catherine, Aktienrecht, Zurich 2000. b)

244

On both stock corporation and limited liability company

– Beeler Adolf, AG, GmbH oder Einzelfirma? Aktueller Ratgeber fr den Unternehmer zur Wahl der richtigen Rechtsform, 3rd edition, Berne 2000. – Bosshard Cornelia/Khr Michel, Gesellschaftsrecht, Zurich 2004. – Guhl, Theo/Druey Jean-Nicolas, Das Schweizerische Obligationenrecht, Zurich 2000. – Honsell Heinrich/Vogt Nedim P./Watter Rolf, Basler Kommentar zum Schweizerischen Privatrecht – Obligationenrecht II: Art. 530-1186 OR, Basel 2002. – KPMG Fides, Accounting and Business in Switzerland, Zurich 2002. – Kren Kostkiewicz Jolanta/Bertschinger Urs/Breitschmid Peter/Schwander Ivo, Handkommentar zum Schweizerischen Obligationenrecht, Zurich 2002. – Meier-Hayoz Arthur/Forstmoser Peter, Schweizerisches Gesellschaftsrecht, 9th edition, Berne 2004. – Riemer Hans M., Entwicklungen im Gesellschaftsrecht, Zurich 2003. Adrian Drig

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III. Limited liability company

– Schweizerische Treuhandkammer (Swiss Institute of Certified Accountants), Schweizer Handbuch der Wirtschaftsprfung (Auditing Handbook), Volume I-IV, Zurich 1998. – von der Crone Hans Caspar/Weber Rolf H./Zch Roger/Zobl Dieter, Neue Tendenzen im Gesellschaftsrecht, Zurich 2003.

III. Limited liability company 1.

Character and advantages as compared to the stock corporation

246 The limited liability company is a form of organization with a simple structure that can be regulated in less detail and less strictly. It consists of two corporate bodies, which are the partners’ meeting and the management (i. e., no board of directors); in addition, the articles of incorporation may provide for special auditors (besondere Kontrollstelle, organe spe´ciale, speciale ufficio di revisione) who have, in principle, the same duties as the auditors of a stock corporation. The limited liability company is suited for a small number of partners (= “shareholders” of the limited liability company) with long-term partnership relations and in which the partners participate directly in management and not necessarily merely by financial participation. 247 A limited liability company has a limited capital divided into quotas (= “shares” of the limited liability company). The share capital is limited to a maximum of CHF 2,000,000. This limitation applies only to the par value of the share capital, i. e., the share capital may be higher in practice, as long as a premium price has been paid. The identity of the partners must be stated in the commercial register. The equity holders, therefore, generally lose their anonymity, which makes this corporate form of business organization less desirable and, in most cases, only appropriate for rather small companies. Any change in or transfer of quotas requires an amendment of the articles of incorporation. 248 The partners’ liability is limited to the company’s registered capital. The articles of incorporation, however, may impose obligations on the partners in addition to paying-in the quotas. In the event of loss of capital, partners may commit to supplementary financial contributions to the limited liability company. 249 As compared to the stock corporation,140 the limited liability company’s advantages are, in essence, the following: – The capital requirement is lower (minimum capital of a stock corporation is CHF 100,000 of which CHF 50,000 must be paid in, whereas the minimum capital of the limited liability company is CHF 20,000, of which CHF 10,000 must be paid in). This makes the limited liability company attractive for small business operations.141 140 141

868

See Section II above. For US tax reasons (“check-the-box”), the Swiss limited liability company is attractive for US companies and is, in this instance, also used for larger business operations. See Section III.9 below.

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2. Formation

Switzerland

250

– The structural (agency) costs are relatively low since neither a board of directors nor auditors is required by law. – The possible restrictions on the transfer of quotas in a limited liability company are not limited, which may be an advantage where control over the company is an important concern.142 – The stock corporation must comply with many more mandatory provisions of statutory law than the limited liability company. Certain features of a limited liability company will change since the provisions regard- 250 ing the limited liability company are currently subject to a complete revision.143

2.

Formation

a)

Formation procedure

The incorporation of a limited liability company requires at least two individuals and/or 251 entities acting as founders. By and large, the formation procedure for a limited liability company is the same as for a stock corporation.144 The limited liability company is established in such a way that all founders declare the 252 formation of the company and adopt its articles of incorporation in a notarized deed. In this notarized deed, the founders confirm that they have subscribed to all quotas, that on each quota the amount required by law, or a higher amount stipulated in the articles of incorporation, has been paid in and is at the free disposal of the limited liability company, or is covered by contributions in kind provided by the articles of incorporation, and that contracts for contributions in kind or for acquisition of assets have been produced. The deed must further list the documents forming the basis of the confirmation. The 253 notary is required to declare that such documents have been submitted both to him and to the founders. Contributions in kind are deemed valid only if the limited liability company, upon its 254 entry in the commercial register, can immediately dispose of them as owner, or is entitled to require unconditional entry thereof in the real estate register. b)

Registration procedure

Following the founders’ meeting, an application for registration must be filed with the 255 commercial registry where the limited liability company is to be registered. The appli142

143 144

A similar result may, however, be achieved for a stock corporation by means of a share transfer restriction in the articles of incorporation (to the extent possible) and additional contractual transfer restrictions in a shareholder’s agreement. See Section II.4.b) above. See Section III.12 below. See Section II.2.a) above.

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Switzerland

III. Limited liability company

cation must be signed by all managing directors (Gescha¨ftsfu¨hrer, ge´rants, geranti) of the limited liability company. It must include: – the names of all partners, their domicile, and citizenship; – the amount of each partner’s quota and the part performed on account thereof; – the names of the managing directors, whether partners or third parties; – the manner in which the limited liability company is to be represented. 256 The application must be accompanied by a notarized copy of the articles of incorporation and of the public foundation deed. Furthermore, the applicants must provide evidence that all quotas have been subscribed to, that the statutory amount or a higher amount provided for by the articles of incorporation has been paid in on each quota or is covered by contributions in kind provided for in the articles of incorporation, and that the payments and contributions in kind are at the free disposal of the limited liability company. 257 Upon the registration, i. e., entry, of the limited liability company in the commercial register, the limited liability company is deemed validly incorporated and duly existing as a legal entity. The registration is evident by a commercial register extract regarding the limited liability company. Notice of the limited liability’s registration is published in the SOGC. The information on the newly formed limited liability company published includes: – the date of the articles of incorporation; – the corporate name and domicile; – the purpose and, if the articles of incorporation contain a provision to this effect, the duration; – the name, domicile, and citizenship of each partner (in the case of legal entities and commercial companies their names and domiciles); – the amount of the capital and of the quota of each partner; – a description of, and the price paid, for contributions in kind and assets acquired by the limited liability company; – the names of the managing directors, their domiciles, and citizenship; – the manner in which the limited liability company is represented; – the manner and form in which the limited liability company publishes its notices. c)

Approval requirements

258 As compared to the stock corporation, no additional145 approval requirements apply to the limited liability company. d)

Shelf limited liability company

259 The reservation of a corporate name for a limited liability company is not possible.146

145 146

870

See Section II.2.c) above. See Section II.2.d) above.

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2. Formation

e)

Costs and duration

aa)

Costs

Switzerland

260

The costs for establishing a limited liability company are generally somewhat lower 260 than for a stock corporation.147 Also, the annual costs for compliance are, as compared to the stock corporation, lower 261 for a limited liability company. This is particularly the case if the company has no auditors.148 bb) Duration

The registration of a limited liability company takes about as long as the registration of 262 a stock corporation.149 f)

Pre-formation status

As is the case for a stock corporation in formation, the provisions regarding the simple 263 partnership in the CO are also applied to the limited liability company in its phase of formation.150 g)

Stationery

As compared to the stock corporation, no additional general requirements for stationery 264 of a limited liability company exist.151 Logos and writings do not have to indicate the legal form of the limited liability company. However, unlike the stock corporation, the limited liability company must always mention its legal form when using its corporate name.152 h)

Corporate name

In general, the same provisions for the stock corporation apply to the limited liability 265 company.153 Unlike the stock corporation, however, the corporate name of the limited liability company must end with an indication of its legal form in one of the Swiss official languages. The corporate name, therefore, must include at the end either „GmbH“ (or „Gesellschaft mbH“), «Srl», or “Sagl”.

147 148 149 150 151 152 153

See See See See See See See

Section II.2.e)aa) above. Section III.8.f) below. Section II.2.e)bb) above. Section II.2.f) above. Section II.2.g) above. Section III.2.h) below. Section II.2.h) above.

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266

i)

Switzerland

III. Limited liability company

Business year

266 The rules governing the business year of a stock corporation apply to the limited liability company as well.154

3.

Partners

a)

Rights and duties of a partner

aa)

Economic rights

267 Except as otherwise provided for by the articles of incorporation, the partners are entitled to the net profit showing on the annual balance sheet in proportion to the amounts paid in on account of their quotas. 268 As is the case for a shareholder of a stock corporation, a partner has a right to the liquidation proceeds of the limited liability company in proportion to his quota in the company’s capital. 269 Except as otherwise provided for by the articles of incorporation, or the partner resolution to increase the capital, each member is entitled to require a proportional increase of his quota whereby the nominal value of the quota is decisive. bb) Membership rights

270 Unless otherwise provided for by the articles of incorporation, the voting right of each partner is proportionate to the value of his quota; thus each CHF 1,000 entitles the partner to one vote. The articles of incorporation, however, may not provide that the voting right be withdrawn. 271 The articles of incorporation may grant the partners a right to withdraw from the limited liability company and may subject this right to specific conditions. 272 Each partner may, for important reasons, ask the judge to grant permission to withdraw from the limited liability company or for its dissolution. cc)

Control rights

273 If the authority to manage the limited liability company is not vested in all partners, the non-managing partners have the same control rights as the non-managing partners of a simple partnership. The articles of incorporation may substitute these control rights by providing for special auditors155 who must also ensure that the quota register156 is duly

154 155

156

872

See Section II.2.i) above. The composition and duties of the special auditors are governed by the provisions of the law on auditing that apply to the stock corporations. See Section III.8.f) below. See Section III.4.a) below.

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3. Partners

Switzerland

274

kept. In case there are special auditors, each partner has the same control rights as a shareholder of a stock corporation.157 dd) Right and duty to manage and represent

As a rule, all partners have the right and the duty to collectively manage and represent 274 the limited liability company. However, the management and the power to represent the limited liability company may also be transferred to one or several partners or to persons who are not partners by the articles of incorporation or by a partner resolution.158 Partners joining after the formation of the limited liability company have the right and 275 duty to manage and represent the company only if such powers and duties are transferred to them by a partner resolution. ee)

Duties

Except as otherwise provided for in the articles of incorporation, and without prejudice 276 to the provisions relating to contributions in kind, the partners are required to make payments in cash in proportion to the par value of their quotas. This duty may only be waived or deferred in the case of a capital reduction. The articles of incorporation may require the partners to make supplementary capital 277 payments in excess of the amount of their quota. Such payments may only be used to cover balance sheet deficits. They are not subject to the provisions concerning the company capital. The provisions in the articles of incorporation requiring supplementary capital payments are valid only if they limit the aggregate amount of these payments to a fixed amount or to an amount proportionate to the company capital. A partner resolution is required to call for such supplementary capital payments. Unless otherwise provided, such payments must be made by the partners in proportion to their quotas.159 b)

Partners’ meeting

aa)

Powers

The partners’ meeting is the supreme body of the limited liability company. It has the 278 following inalienable powers: – to adopt and amend the articles of incorporation; – to elect and dismiss the managing directors and the special auditors, if any; – to approve the profit and loss statement and the balance sheet as well as the resolution concerning the use of the net profit; – to discharge the managing directors from liability; – to divide quotas; – to make calls for supplementary capital payments provided by the articles of incorporation;

157 158 159

See Section II.3.a)c), Section II.3.a)d) and Section II.3.a)e) above. See Section III.6.b) below. For the partners’ liability for company debts, see Section III.7.a)aa) below.

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III. Limited liability company

– to assert claims for damages due to the limited liability company against bodies or individual partners resulting from the formation or from the management of the company. 279 Unless otherwise provided by the articles of incorporation, the partners’ meeting has the power to call for payments in respect of quotas and to appoint holders of procuration (Prokuristen, fonde´s de procuration, procuratori) and commercial mandate holders (Handlungsbevollma¨chtigte, mandataires commerciaux, agenti di negozio) for the operation of the entire business. 280 In addition, the articles of incorporation may provide further corporate actions or duties, which shall be reserved for the partners’ meeting and for which, otherwise, the managing directors would be responsible. bb) Calling

281 A partners’ meeting is called by the managing directors annually, within six months after the close of the business year, in accordance with the articles of incorporation, and whenever the interests of the limited liability company so require. Also, one or several partners representing at least one tenth of the capital may request – in written form stating the purpose of such meeting – the calling of a partners’ meeting. If the managing directors fail to comply with this request within an appropriate time period, the judge, upon request of the applicants, shall order the calling of the meeting. 282 The notice of the meeting, and also any request to vote by circular letter must be made in the form provided by the articles of incorporation; if lacking such provision, by registered letter, stating the agenda items and observing a time period of at least five days prior to the meeting. 283 All partners may, if no objection is raised, hold a partners’ meeting without observing the formalities laid down for calling such a meeting. All matters falling within the competence of the partners’ meeting may be validly discussed and resolved as long as all partners are present. c)

Partner resolutions

284 Instead of voting at a partners’ meeting, the articles of incorporation may provide for voting by circular letter for all or for any specific agenda items. This is especially advantageous when partners live far apart. 285 Unless otherwise provided for by law,160 or by the articles of incorporation, partner resolutions are passed by an absolute majority of the votes cast. If the meeting is replaced by a vote by circular letter, the majority is calculated according to the total number of votes to which the partners are entitled.

160

874

For qualified statutory quorum requirements, see Section III.5.b) below.

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4. Quotas

Switzerland

286

A partner may not exercise his voting right if a vote is taken in relation to his discharge 286 from liability as a managing director. Partner resolutions may be challenged according to the corresponding statutory provi- 287 sions on the stock corporation.161 d)

Partner exclusion

For important reasons, the limited liability company may request that the judge exclude 288 a partner if the majority of partners, representing at the same time the majority of the company capital, consents to such an action.162 A partner who fails to pay in the amount of his quota within the time period provided is 289 liable to pay default interest and, if provided by the articles of incorporation, liquidated damages. A partner may be excluded if he fails to perform within a subsequent time period of at least one month after receiving two requests for payment by registered letter. The excluded partner remains liable for the amount not paid in.

4.

Quotas

a)

Classes of quotas

The quotas have a minimum par value of CHF 1,000. The shares of the individual 290 partners may vary but must be at least CHF 1,000 or a multiple thereof. Only one single quota per partner is permitted.163 The quotas are recorded in a register that specifies the names of all partners, the 291 nominal amount of their quotas, the amount paid in on each partner’s quota, as well as every transfer of a quota and every other change of these facts. At the beginning of each calendar year, the register, signed by the managing directors,164 must be filed with the competent commercial registry at the place of the limited liability company’s domicile, or the commercial registry must be notified that no changes have occurred since the last filing. In other words, such information must be publicly disclosed and updated annually.

161 162

163 164

See Section II.3.c) above. An exclusion becomes effective only after compliance with the provisions regarding the reduction of the company capital; this holds true unless the departing partner is compensated out of net assets in excess of the company capital, or provided that his quota is liquidated under the provisions on default with regard to the obligation to pay in, or is acquired by another partner. See, however, the proposed amendment in this respect as described in Section III.12 below. The managing directors are personally, jointly, and severally liable for damages resulting from failing to keep the quota register in due order or accurate.

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292

b)

Switzerland

III. Limited liability company

Transfer of quotas

292 The quotas cannot be issued as negotiable instruments (such as the share certificates of a stock corporation).165 This makes their transfer cumbersome since the assignment is only valid if recorded in a notarized deed.166 293 In addition, the assignment of a quota is only effective vis--vis the limited liability company if the limited liability company has been notified, and the assignment has been entered in the quota register. The entry requires the approval of at least three quarters of the partners representing at least three quarters of all issued quotas.167 The articles of incorporation may make an assignment subject to certain conditions or may even prohibit the assignment. 294 The provisions governing the transfer of a quota also apply to a partner’s acquisition thereof. The quota of the partner who acquires all or part of another partner’s quota is increased by the appropriate par value. 295 The acquisition of a quota by succession, or by virtue of marital property law, requires the consent of the other partners only if the articles of incorporation so provide. Even if the articles of incorporation require such consent, the entry may be refused only if the quota is to be transferred at its real value to an acquirer designated by the limited liability company. c)

A limited liability company’s own quotas

296 A limited liability company may acquire its own quotas with nearly no restrictions.168 It may do so after the quotas have been fully paid-in, but only out of the company’s assets available in excess of the company capital. The acquisition of all quotas is not permitted and would be deemed null because no partner(s), a constituent element of a limited liability company, would remain.

5.

Articles of incorporation

a)

Mandatory content

aa)

Provisions required by law

297 The articles of incorporation of a limited liability company must contain provisions on: – its corporate name and domicile; – the corporate purpose; 165 166 167 168

876

A limited liability company’s listing on a stock exchange is, therefore, not possible. This requirement is, however, expected to be abolished. See Section III.12 below. See, however, the proposed amendment in this respect as described in Section III.12 below. The proposed amendment to the CO provisions on the limited liability company provides, however, for the same rules as currently in force for the stock corporations. See Section II.4.c) above.

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5. Articles of incorporation

Switzerland

298

– the amount of the capital and the amount of each partner’s quota; – the form in which the limited liability company must publish its notices. bb) Additional provisions

To be binding, the following provisions must be included in the articles of incorpora- 298 tion: – the increase of the statutory minimum amount of the part to be paid in of each quota, exceptions to the statutory requirements concerning such payments, and providing for liquidated damages for not paying in in a timely fashion; – the basis of the partners’ obligation to make supplementary capital payments (Nachschu¨sse, versements supple´mentaires, versamenti suppletivi) or other performances in excess of their quota (details thereof may be contained in separate regulations); – substitution of the passing of resolutions at a partners’ meeting by voting by circular letter as well as special provisions regarding the calling of the partners’ meeting and the calling for votes by circular letter; – provisions deviating from the statutory requirements regarding the determination of voting power and the passing of resolutions in the partners’ meeting; – the extension of a non-competition clause to all partners; – provisions deviating from the statutory requirements regarding the appointment of holders of procuration and commercial mandate holders for the operation of the entire business as well as regarding the supervision of the management, in particular, by the appointment of special auditors; – any prohibition on the assignment of quotas or the imposition of conditions on such assignment more stringent than those imposed by law; – any distribution of net profits deviating from the statutory provisions and the promise to pay construction interests; – the right to withdraw from the limited liability company and the conditions for exercising such right; – the limitation of the duration of the limited liability company; – provisions regarding reasons for dissolution other than those provided for by law. If a partner’s quota consists of a contribution in kind, the articles of incorporation must 299 indicate the subject matter thereof, its value, and the amount attributed thereto as well as the name of the partner making the contribution in kind and the amount of the quota allotted to him in exchange. If the limited liability company is to acquire assets from partners or from third parties, the articles of incorporation must indicate the assets to be acquired, the name of the transferor, and the consideration given by the limited liability company in exchange. b)

Amendment of the articles of incorporation

The articles of incorporation may be amended by resolution of the partners’ meeting in 300 the form of a notarized deed. The amendment requires the approval of three quarters of all partners representing at least three quarters of the capital, unless otherwise provided for by the articles of incorporation. Any resolution resulting in an increase of the

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Switzerland

III. Limited liability company

partners’ contributions, or an extension of their liability, may only be made with the approval of all partners. 301 Upon entry in the commercial register, the resolution becomes effective also against third parties. c)

Capital increase and reduction

aa)

Capital increase

302 The capital of a limited liability company may not be increased to a par value in excess of CHF 2,000,000. A limited liability company may increase its capital in accordance with the provisions on formation. In particular, the provisions concerning contributions in kind and the acquisition of assets apply. Also new partners may participate in a capital increase. 303 Unless otherwise stipulated in the articles of incorporation or by the resolution concerning the capital increase, each partner is entitled to subscribe to a share of the increase, in proportion to his prior quota. 304 The capital of a limited liability company may not be increased by way of authorized or contingent capital increase.169 bb) Capital reduction

305 The capital of a limited liability company may not be reduced to less than CHF 20,000 and the individual quota to not less than CHF 1,000. 306 The provisions on the reduction of the share capital of stock corporations apply accordingly.170

6.

Management

a)

Managing directors

aa) General

307 As a matter of law, the limited liability company has no board of directors but only a management that by law consists of all founding partners.171 Consequently, there is no intermediate body between the owners and the management of a limited liability company as is in place with the board of directors of a stock corporation, which may delegate the day-to-day management to officers and focus its activities on supervision and control functions.172

169 170 171 172

878

Cf. Section II.5.c)aa) above. See Section II.5.c)bb) above. See Section III.3.a)dd) above. Cf. Section II.6 above.

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6. Management

Switzerland

308

The articles of incorporation, however, may provide a special (non-statutory) super- 308 visory corporate body to which certain powers are delegated, and may determine its specific powers and duties. The functions of this supervisory corporate body would otherwise be performed by the partners’ meeting. bb) Eligibility

Managing directors may be, but do not need to be partners of the limited liability 309 company. At least one member of the management must be a resident of Switzerland. Typically, a 310 general managing director is elected by the partners to manage and to represent the limited liability company. At least one managing director must have sole signing authority to bind the limited liability company and be a resident of Switzerland or must be empowered to sign jointly with another managing director domiciled in Switzerland. Unlike the majority of the members of the board of directors,173 the managing directors 311 must not necessarily be Swiss citizens or citizens of a member state of the EU or the EFTA. cc)

Powers and duties

Managing directors, be it as partner or third person, may perform in the name of the 312 limited liability company all legal acts that may arise within the company’s purpose and which are not reserved for the partners’ meeting. Internally, the managing directors are responsible for any corporate action that might 313 arise while conducting the business: administration, calling for partners’ meetings, passing resolutions regarding investments, budgeting, etc. b)

Management and representation

aa)

Duty of care and loyalty

The managing directors are required to carry out their duties with due care and loyalty 314 and must duly safeguard the best interests of the limited liability company.174 In particular, a managing director, who is at the same time a partner, under a statutory 315 covenant, may not compete with the business of the limited liability company. Without the consent of the other partners, he may, within the area of the business activities of the limited liability company, deal neither for his own account nor for the account of others; in addition, he may not participate in another enterprise as a general or limited partner, nor as a partner of a limited liability company. This non-competition undertaking may be extended to all partners by the articles of incorporation.

173 174

Cf. Section II.6.a)bb) above. The statements made for the members of the board of directors of a stock corporation apply mutatis mutandis: see Section II.6.b)aa) above.

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Switzerland

III. Limited liability company

bb) Delegation of management

316 By statutory law, the partners are, in principle, required to manage the business of the limited liability company personally. The delegation of management powers and duties is, however, possible only if this authority is provided for in the articles of incorporation or passed as partner resolution.175 This delegation of powers and duties must be clearly defined and limited to those specific powers and duties. 317 The articles of incorporation or a partner resolution may also transfer the management of the limited liability company to persons who are not partners. The powers and the responsibilities of these persons are subject to the provisions on managing partners. 318 Other than the board of directors of the stock corporation (that may delegate the management to lower levels by adopting organizational regulations),176 the managing directors are not authorised to delegate the management in a general way to other persons who are not managing directors. cc)

Representation

319 The power to represent the limited liability company initially lies with all the founding partners. It may be transferred, however, to one or several partners or to persons who are not partners by the articles of incorporation or by a partner resolution. 320 The scope and limitation of the managing directors’ power to represent the limited liability company are governed by the statutory provisions of the stock corporation. 321 The withdrawal of the management’s right and authority to represent the limited liability company are governed – among the partners – by the statutory provisions on the general partnership. The management’s right and authority to represent the limited liability company with a managing director who is not a partner may be withdrawn any time by a partner resolution. 322 The limited liability company is liable for any damage resulting from torts committed by a person authorized to manage or to represent the limited liability company in the exercise of his business duties.

7.

Selected liability and capitalization questions

a)

Partners’ and managing directors’ liability

aa)

Partners’ liability

323 Other than the shareholders of a stock corporation, the partners of a limited liability company are, to a certain degree, jointly and severally liable for all debts of the limited liability company. This liability is, however, limited to the amount of the entire nominal capital of the company, and the partners are discharged from this liability to the 175 176

880

Cf. Section III.3.a)dd) above. See Section II.6.b)bb) above.

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8. Accounting

Switzerland

324

extent of the paid in company’s capital, and the liability is not reduced by repayments, or by unjustified withdrawals of profits or interest, except for construction interest. In addition, the partners’ liability is subsidiary in nature: The partners can be held liable 324 for company debts only after the company itself has been dissolved or been declared bankrupt and, following the limited liability company’s dissolution, not all of its creditors have been fully paid.177 bb) Managing directors’ liability

The managing directors and any person entrusted with the management of a limited 325 liability company are liable to the company, to any partner, and to any creditor for damages caused by willful or negligent violation of their duties. The statutory provisions on the stock corporation apply.178 b)

Debt-equity ratio

Debt-equity ratio, as laid down by Swiss tax law, applies to a limited liability company as 326 it does to a stock corporation.179 c)

Capital loss, over-indebtedness, and postponement of bankruptcy

The statutory provisions on stock corporations apply by analogy if half of the capital of a 327 limited liability company is no longer covered by net assets (capital loss), or if the company becomes over-indebted.180 With over-indebtedness, and with a partners’ obligation for supplementary capital payments, the judge must be notified only if the loss shown in the balance sheet is not covered by the partners within three months. In case of the limited liability company’s over-indebtedness when special auditors are 328 elected, the auditors are required to notify the competent judge if the managing directors fail to do so. The special auditors, however, have no specific duty to convene a partners’ meeting nor to propose reorganization measures in case of a capital loss if the managing directors have not complied with their duties.

8.

Accounting

a)

Bookkeeping

Due to the limited liability company’s requirement to be registered in the commercial 329 register, it must keep the necessary books of account, according to the type and scope of 177

178 179 180

If the limited liability company is dissolved, the liquidators or the bankruptcy administrator determine each partner’s liability and demand payment pursuant thereto. The partners have a right of recourse against each other in proportion to the amount of their quotas. See Section II.8.a) above. See Section II.8.b) above. See Section II.8.c) above.

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330

Switzerland

III. Limited liability company

its business; properly reflect its financial state; and determine the liabilities, claims, and the operating results of each year.181 b)

Accounting principles

330 A limited liability company is required to comply with the fundamental accounting principles as set forth in Art. 957-964 CO and in the relevant provisions for the stock corporations of the CO.182 331 To the extent the limited liability company has no special auditors, compliance with applicable accounting principles is the sole responsibility of the managing directors. c)

Annual financial statements

332 A limited liability company must prepare each year an annual business report consisting of the annual financial statements (profit and loss statement, balance sheet, and notes to the accounts), the annual report, and the consolidated financial statements (if required). The same rules as for the stock corporations apply in this regard.183 d)

Disclosure of financial statements

333 As compared with the stock corporation, no special requirements exist as to the disclosure of financial statements of a limited liability company.184 e)

Consolidation

334 As compared with the stock corporation, no special requirements exist as to the consolidation of annual financial statements of a limited liability company.185 f)

Audit requirements

335 The election of auditors is not mandatory.186 336 If the authority to manage the limited liability company is vested with all partners, the partners have reciprocal control rights regarding the company’s books. 337 If the authority to manage the limited liability company is not vested with all partners, then the partners who are not managing directors have the right to require from the

181 182 183 184 185 186

882

See Section II.9.a) above. See Section II.9.b) above. See Section II.9.c) above. See Section II.9.d) above. See Section II.9.e) above. See, however, Section III.12 below.

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9. Taxation

Switzerland

338

managing directors information on all company affairs and to inspect the company’s books and records.187 The limited liability company’s articles of incorporation may, however, substitute these 338 control rights by providing for the election of special auditors. In such a case, the qualification and independence requirements, as well as the powers and duties of auditors for stock corporations, apply as well to these special auditors,188 and each partner has the same control rights as a shareholder of a stock corporation.189 g)

Setting up of reserves

For the requirements of a limited liability company to set up reserves, Art. 805 CO refers 339 to the provisions of the stock corporation.190

9.

Taxation

To the extent Swiss tax law applies, no noteworthy differences exist between stock 340 corporations and limited liability companies.191 From an US tax law perspective, however, the choice of legal form can have a significant effect. US tax law considers a Swiss stock corporation a “per se corporation” whereas, for any Swiss limited liability company, the privilege of choice (the so-called “check-the-box”-regulation) applies. When choosing a Swiss limited liability company, US companies may choose to have the Swiss limited liability company included in their US tax return or not. In case they so choose, the limited liability company’s Swiss taxes paid can be subtracted from the tax amount they are required to pay in the US.

10. Dissolution and liquidation The reasons for dissolving a limited liability company are enumerated in the CO.192 341 Contrary to the stock corporation that only recognises capital-related reasons,193 the dissolution provisions for the limited liability company show person-related elements: Each partner can demand that the judge decide on the dissolution of the limited liability company for important reasons. For the limited liability company, those also 187 188 189 190 191 192

193

See Section III.3.a)cc) above. See Section II.9.f) above. See Section II.3.a)c), Section II.3.a)d) and Section II.3.a)e) above. See Section II.9.g) above. See Section II.10 above. The limited liability company may be dissolved in accordance with the articles of incorporation; by a notarized resolution of the partners’ meeting in which the majority, unless otherwise provided for by the articles of incorporation, must be three quarters of all partners, representing at least three quarters of the company capital; by adjudication in bankruptcy; by a court order upon request of a partner for important reasons; in all other cases provided for by law. See Section II.11 above.

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883

342

Switzerland

III. Limited liability company

include personal reasons, such as the bad partner relationships, either with other partners or with the company. For instance, abuse of confidence, serious quarrels between the partners, or continuous neglect of collateral duties can be sufficient to dissolve the company. 342 It is a particularity of the limited liability company that the quota of a partner not only represents capital but, to a certain degree, also his personality. If a partner becomes bankrupt, or if his quotas have been pledged, the quotas cannot simply be transferred to another person. It is regarded intolerable to require the other partners to accept any other partner who might be unwanted, as can be the case for the stock corporation. As a consequence, the bankruptcy administrator and the creditors can demand the dissolution of the company.194 The law provides, however, various possibilities for the partners to avoid the dissolution, such as discharging the creditors of the bankrupt partner or the complete take-over of his quota by another partner of the company. 343 For the appointment and the removal of liquidators, the deletion of the limited liability company from the commercial register, and the preservation of its books thereafter, the pertinent provisions regarding the stock corporation apply.195

11. Insolvency, debt enforcement, moratorium, and bankruptcy 344 In general, reference to the comments made concerning the stock corporation are relevant here.196 345 The dissolution, or the unsuccessful debt enforcement, of a limited liability company, are prerequisites for any personal liability of the partners that may occur. This liability is joint, but limited to the amount of nominal capital.197

12. Proposed amendment to the provisions on the limited liability company 346 The CO’s provisions regarding the limited liability company are currently subject to a complete revision. The Federal Government submitted a draft version of the provisions to be amended to the Federal Parliament in December 2001. The draft removes the major disadvantages of the existing law. It aims at a better level of protection for both 194

195 196 197

884

If a partner falls into bankruptcy, the bankruptcy administrator may, by giving not less than six months’ notice, require the dissolution of the limited liability company. The same right exists for a creditor of a partner who has been pledged the latter’s quota. If such notice leads to the dissolution and liquidation of the limited liability company, the liquidators are required to transfer the liquidation proceeds, attributable to the partner, who is subject to debt enforcement proceedings to the bankruptcy administrator or the debt enforcement office. However, in practice, this CO provision (Art. 793) has proven to be of very limited relevancy. See Section II.11 above. See Section II.12 above. See Section III.3.a)ee) above.

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13. List of publications

Switzerland

346

the partners and the creditors. Further, it brings the law closer in line to the main concepts of the stock corporation. The revised provisions are not expected to enter into force before 2006. Their most important points are the following: – The minimum share capital remains at CHF 20,000, but it must be paid in full. – The maximum share capital limit of CHF 2,000,000 is abolished. – The liability of the partners is limited to the par value of their quotas. The liability for the unpaid quota of the other partners is abolished. – The minimal par value of the quotas is reduced to CHF 100. Each partner can have more than one share. The former principle, that the participation of each partner could only be incorporated in one share, is abolished. – The transfer of quotas may be subject to restrictions. Absent any contrary rule in the articles of incorporation, the consent of the limited liability company is required for any transfer and is subject to a qualified majority in the partners’ meeting. The former rule, that the transfer was accomplished by way of a public deed, is abolished. – The articles of incorporation may provide for an obligation of the partners to make supplementary capital payments in cash or for other obligations. Such contributions must have their basis in the articles of incorporation. The partners’ obligation to make supplementary capital payments to the limited liability company is limited to the double of the par value of the partner’s quota. – The limited liability company is managed by one or more managing directors who need not be partners. At least one partner must be a managing director and authorized to represent the company vis--vis third parties. – Limited liability companies must elect auditors (i) if the share capital is at least CHF 100,000, (ii) if the company exceeds two of the following thresholds in two consecutive years: balance sheet total of CHF 5,000,000, aggregate revenues of CHF 10,000,000, and 50 full time employees on an yearly average, or (iii) if a partner, who is subject to a supplementary capital payment obligation, requires so. The requirements for the auditors of a stock corporation apply to the limited liability company by analogy. – The articles of incorporation may set out additional reasons for excluding a partner by resolution of the partners’ meeting as well as for his voluntary retirement. The exclusion by a judge, if an important reason can be shown, is retained.

13. List of publications a)

On limited liability company only

– Brupbacher Erwin, GmbH – Die Gesellschaft mit beschrnkter Haftung, Zurich 1995. – Forstmoser Peter/Rapp Jean-Marc, Vorentwurf fr eine Reform des Rechts der Gesellschaft mit beschrnkter Haftung, Zurich 1999. – Handschin Lukas, Die GmbH – ein Grundriss, Zurich 1996. – Janggen Arnold/Becker Hermann, Berner Kommentar zum Schweizerischen Zivilgesetzbuch – Obligationenrecht – Die Gesellschaft mit beschrnkter Haftung (Art. 771-827 OR), Berne 1939.

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885

348

Switzerland

IV. Branches

– Kng Rechtsanwlte, Grndung einer GmbH: Do-it-yourself, Zurich 2002. – Meier-Schatz Christian J. [et al.], Die GmbH und ihre Reform – Perspektiven aus der Praxis, Zurich 2000. – Wohlmann Herbert, GmbH-Recht, Basel 1997. b)

On both limited liability company and stock corporation

348 See Section II.14.b) above.

IV. Branches 1.

Character of branches and branches as compared to subsidiaries

349 A foreign company that intends to set up a business presence in Switzerland can do so either by establishing its Swiss operation as a subsidiary or as a branch. While a subsidiary is a parent company’s 100 % owned, but legally independent entity, with its own legal identity, a branch is not considered a legal entity separate from the company (head office).198 However, a branch constitutes a separate place of business conducting a business within the scope of the head office’s corporate purpose. 350 Swiss statutory law does not define the constituent elements of a branch. According to case law of the Federal Supreme Court, a branch is considered a business establishment with its own business organization which, as part of a parent company, permanently conducts a similar activity and thereby enjoys a certain degree of economic and commercial autonomy. The personnel of the branch must be separate from that of the head office and be available to the branch; this means that the personnel of the branch can conclude business without the assistance of the head office. 351 The branch’s most critical feature is that it is, to a certain degree, though limited to its own operations, economically and commercially independent from its head office. In other words, the branch is not entirely controlled by the head office directly (this would, in fact, be the case if the managing director of the Swiss branch would also be active at the head office or any other branch of the parent company). 352 Important elements of the branch’s autonomy/independence from the parent company are the following: – direct contacts with customers; – its own agreements with third parties; – its own letterhead; – current operations to be decided locally; and – autonomy vis--vis the outside world (its own access to the market).

198

886

Consequently, there is no legal creditor /debtor relationship between the parent company and the Swiss branch.

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2. Establishment of a Swiss branch of a foreign company

Switzerland

353

A Swiss branch has the power, under Swiss law, to have rights and obligations in its own 353 name and can enter into contracts because it has a certain organizational and financial independence from the head office. Further, it can sue and be sued at its place of business regarding matters arising from the business of such branch office. But legally, the branch is part of the company (head office). For example, if the company is liquidated, the effects of the liquidation also extend to the branch office. The legal owner of the assets the Swiss branch is dealing with is the head office. The assets and liabilities of the Swiss branch “belong” to the head office. For tax purposes, however, they are allocated to the Swiss branch.199 The management of the foreign parent company is also liable for the business the Swiss branch conducts. The Swiss branch office of a foreign company is subject to Swiss law, including the Swiss 354 conflict of laws rules. As a consequence, if the Swiss conflict of laws rules so provide, certain undertakings and agreements of a Swiss branch may be subject to Swiss substantive law. Furthermore, it is not the foreign law at the parent company’s place of incorporation but rather Swiss law that governs the scope of the authority of the Swiss branch’s authorized signatories to act on behalf of the branch. If the Swiss business operations are only marginally significant, or if the foreign com- 355 pany does not wish to fully capitalize its Swiss business operations, then it may be advantageous to establish a branch office rather than a subsidiary. Consequently, a branch office may be established with a very thin capital base and/or with only a small organization. A branch has the advantage that no separate equity is required as endowment capital provided by the parent company. Further, the establishment of a branch office is easier and cheaper in comparison to that of an independent company. Tax wise, the establishment of a branch is not subject to the federal stamp duty, nor is the transfer of its profits subject to the federal withholding tax.200 If, in contrast, the business operations are conducted on a larger scale or if they, to 356 shield liability, are completely separated from the foreign operations, it may be advantageous to establish a company in Switzerland. If a foreign company sets up a Swiss subsidiary, the dealings between the foreign company and its subsidiary in Switzerland must, however, be effected at arm’s length. The Swiss subsidiary has, other than the operational facility of a Swiss branch of a foreign company, a truly Swiss character.

2.

Establishment of a Swiss branch of a foreign company

A Swiss branch of a foreign company is formally established by a resolution of the 357 competent corporate body of the foreign company – according to the relevant foreign law and the constituent documents of the foreign company – to establish such branch.

199

200

A Swiss (finance) branch is – in conjunction with suitable foreign tax laws – especially attractive tax wise. Transfers of branch profits to the head office are not subject to withholding tax while a corporate shareholder’s dividends are.

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358

Switzerland

IV. Branches

Upon its establishment, the branch must be entered in the commercial register at the branch’s registered office in Switzerland. 358 For the branch’s entry in the commercial register, the following documents must be filed: – application to the commercial registry (to be signed by the president and a second member of the board of directors of the company); – signature specimen for persons authorised to sign for the branch (to be notarized by a notary public and, unless notarized by a notary public in Switzerland, super-legalized by an apostille pursuant to the Hague Convention); – relevant documents of the company showing that it lawfully exists and is duly incorporated in its home country (such as an excerpt from the foreign commercial register /register of companies,201 or a certificate of incorporation and articles of incorporation, to be notarized and super-legalized by an apostille pursuant to the Hague Convention); – confirmation by the company’s secretary (indicating the members of the board of directors, the auditors, and the share capital as well as the shares of the company; signature and function of the company’s secretary to be confirmed by a notary public); – resolution by the board of directors of the company regarding the establishment of the branch (resolving to establish the branch, its registered office, corporate name, area of business, and individuals authorised to sign for the branch); and – written declaration by the individuals who are signing the application and the managing director(s) of the branch regarding the branch’s independence, confirming that the branch is economically independent from the company (i. e., that it has its own offices, and that its managing director(s) is /are not active at the company’s registered office or at other branches of the company).202 359 The branch is required to have the same corporate name as the company. In addition, the branch’s corporate name must indicate the place of the company’s registered office, the place of the branch’s registered office, and the identification of the branch as such by including the term “branch” (“Zweigniederlassung”, “succursale”). 203 360 Swiss corporate law requires electing a managing director for the branch who is a resident of Switzerland and authorised to sign for the branch individually. Alternatively, two managing directors residing in Switzerland and authorised to sign collectively by two may be elected. The managing directors need not be Swiss citizens.

201

202

203

888

If no such register exists under the law of the foreign company’s home country, the foreign company must provide official evidence that it lawfully exists otherwise. The branch to be recognized by the Swiss authorities and registered in the commercial register as such needs to have a certain economic independence from the company, i. e., the branch’s business may not appear to be entirely controlled by the company directly. As a consequence, a corporate name permissible for a Swiss branch office may read “Abc Ltd., London, Zurich branch office”.

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3. Closure of branches

3.

Switzerland

361

Closure of branches

In case the operations of the branch have been terminated, the responsible individuals 361 at the head office must apply for its deletion from the commercial register. The branch is deleted ex officio: – in case the head office is located in Switzerland, on the basis of a notice of the commercial registry at the head office’s domicile stating that the head office has been deleted; and – in case the head office is located abroad, provided it is established that the operations of the branch have been terminated and further provided that the head office has not complied with the request of the commercial registry to have the branch deleted or the head office itself has been deleted.

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362

Annexes

892 Gesellschaft mit beschrnkter Haftung (GmbH) ¯ÆØæMÆ —æØæØK ¯ıŁO (¯—¯) (Eteria Periorismenis Efthinis) (EPE)

Aktsiaselts (AS)

Socit Anonyme faisant publiquement appel l’pargne (SA)

Aktiengesellschaft (AG)

`Pı ¯ÆØæMÆ (`¯) (Anonimi Eteria)

Public Limited Company

Societ per azioni (Spa)

Akcine˙ bendrove˙

Naamloze Vennootschap (NV) met aandelen op naam

Allmennaksjeselskap (ASA)

Estonia

France

Germany

Greece

Ireland

Italy

Lithuania

Netherlands

Norway

Privat aksjeselskap (AS)

Besloten vennootschap met beperkte aansprakelijkheid (BV)

Uzˇdaroji akcine˙ bendrove˙

Societ in responsabilit limitata (Srl)

Private limited company

Socit Anonyme ne faisant pas publiquement appel public l’pargne (SA) Socit par Actions Simplifie (SAS) Socit Responsabilit Limite (SARL)

Osahing (O)

Ltd/Limited

Plc

England

Spolecˇnost s rucˇenm omezeny´m (s.r.o.; spol. s r.o.)

Akciov spolecˇnost (a.s.; akc.spol.)

Private Limited Liability company

Czech Republic

Public Limited Liability Company

Table of Limited Liability Companies and hybrid forms thereof

–

–

–

Societ in accomandita per azioni (Sapa)

–

¯æNææıŁ ŒÆJ K ¯ÆØæMÆ (Eterorrithmi kata metoches Eteria)

Kommanditgesellschaft auf Aktien (KG a.A.)

Socit en Nom Collectif (SNC) Socit en Commandite

Usaldushing (U)

–

–

Limited Partnership with Share Capital

–

–

(closest): Kommandittselskap (KS)

Commanditaire Vennootschap (CV)

–

–

–

–

GmbH & Co. KG

LP/LLP

Komanditn spolecˇnost (kom.spol.; k.s.) se spolecˇnost s rucˇenm omezeny´m jako komplementrˇem

Limited Partnership with a Limited Liability Company as General Partner

Annexes Table of Limited Liability Companies and hybrid forms thereof

spłka akcyjna (S.A)

Akciov spolocˇnost' (a.s.; akc.spol.)

Sociedad Annima (S.A.)

Aktiengesellschaft (AG), Socit anonyme (SA), Societ anonima (SA)

Poland

Slovakia

Spain

Switzerland

Public Limited Liability Company

– Kommanditaktiengesellschaft, Socit en commandite par actions, Societ in accomandita per azioni

Gesellschaft mit beschrnkter Haftung (GmbH), Socit responsabilit limite (Srl), Societ a garanzia limitata (Sagl)

–

spłka komandytowo – akcyjna (S.K.A.)

Limited Partnership with Share Capital

Sociedad de responsabilidad limitada (S.L. / S.R.L.)

Spolocˇnost' s rucˇenm obmedzeny´m (s.r.o.; spol. s r.o.)

spłka z ograniczona˛ odpowiedzialnos´cia˛ (sp. z o. o.)

Private Limited Liability company

–

–

Komanditn spolocˇnost' (kom.spol.; k.s.) zo spolocˇnost'ou s rucˇenm obmedzeny´m ako komplementrom

spłka komandytowa (sp. k.) please note that this company may also have other entities than limited liability company as a general partner and name of this company (spłka komandytowo – akcyjna) does not reflect who ist the general partner

Limited Partnership with a Limited Liability Company as General Partner

Table of Limited Liability Companies and hybrid forms thereof Annexes

893

894

Two-organ structure: shareholders meeting and management board; supervisory board optional

Shareholders and board of directors

Czech Republic (s.r.o.; spol. s r.o.)

England (Ltd)

Structure

At least one shareholder and at least one director

One or more natural or legal persons (s.r.o. with the sole shareholder cannot be a sole founder of another s.r.o., one natural person may be sole shareholder in max. three s.r.o.s); formal recording of the formation

Formation

Minimum cca e 7,000 (CZK 200,000)

No minimum share capital

Details of all directors and the secretary to be provi-

Share Capital

Registration mandatory

Commercial Register

Main characteristics of Private Limited Liability Companies

Limited liability of shareholders. Personal liability

Sole liability of s.r.o., shareholders are liable for obligations of the company only up to the limit of their nonpaid investment contributions (until the pay off is registered into the commercial register)

Each shareholder may own only one ownership interest, equal rights for all shareholders unless otherwise stipulated in corporate documents; transfer of shares by simple agreement with signatures verified by a notary public; listing at a stock exchange not possible Company must have authority to issue shares

Liability Regime

Shares/ transfer/ listing

None

None

Employee Co-Determination

Shareholder approval is necessary to amend arti-

Shareholder resolution in the form of a notarial deed and registration into the commercial register required in both cases, Amendments to articles of association become effective upon resolution (with exceptions), increase/ decrease of registered capital upon registration

Amendment of articles of association; capital increase/ decrease

Not possible

Currently not possible

Cross-border merger

Not possible

Possible if permitted by international treaty or European law

Cross-border transfer of seat

Annexes Main characteristics of Private Limited Liability Companies

Estonia (O)

Two-organ structure: shareholders meeting and management board; supervisory board mandatory, if the share capital is greater than 400,000 Estonian kroons and

Structure

Registration mandatory; own legal personality of the O

ded to Companies House-mandatory notification of share issues, annual return and accounts to be filed (subject to certain small company exemptions).

and a company secretary

One or more natural or legal persons; memorandum of association must be concluded and the articles of association signed

Commercial Register

Formation

Minimum 40,000 Estonian kroons (approx 2564 EUR)

Share Capital

Uniform shareholding, equal rights for all shareholders; transfer of shares by notarial agreement except when the shares are entered in the Estonian Central

and statutory pre-emption rights on issue of new shares. Cannot list a private limited company

Shares/ transfer/ listing

Sole liability of the O; in principle shareholders are not liable

of directors for breach of fiduciary duty, wrongful or fraudulent trading or certain breaches of the Companies Act.

Liability Regime

No employee co-determination

Employee Co-Determination

The amendment of articles of association or reduction or increase of share capital must be registered with the commercial register

cles or to increase share capital. Directors can issue new shares if duly authorised. Capital cannot be repaid except in certain limited circumstances (but less constraints than for plcs)

Amendment of articles of association; capital increase/ decrease

Currently not possible

Cross-border merger

Currently not possible

Cross-border transfer of seat

Main characteristics of Private Limited Liability Companies Annexes

895

896

France (SA; SAS ; SARL)

SA: two or three-organ structure : shareholder meeting and board of directors; or shareholder meeting, management board, supervisory board optional SAS: no prescribed structure, ex-

the management board of the private limited company has less than three members, or if prescribed by the articles of association of the private limited company

Structure

One or more natural or legal persons (minimum seven in SA); formal recording of the formation

Formation

Registration mandatory; own legal personality of the company

Commercial Register

Minimum e 37,000 (SA and SAS), or no minimum (SARL)

Share Capital

SA and SAS: Different classes of shares admitted; transfer of shares by simple agreement (subject to company’s by-laws restricting such transfer); listing at a stock ex-

Register of Securities; listing at stock exchange not possible

Shares/ transfer/ listing

Sole liability of the company; in principle shareholders are not liable

Liability Regime

Compulsory only in stateowned SA or when employees own more than 3% of the shares of a SA Not compulsory in SAS or SARL

Employee Co-Determination

Exclusive competence of the extraordinary general meeting (two-thirds majority in SA, threefourth in SARL); in SAS, majority rule is set in the bylaws Modification

Amendment of articles of association; capital increase/ decrease

Currently impractical

Cross-border merger

Unanimous consent required; company is dissolved unless a convention is in place between France and the new host country

Cross-border transfer of seat

Annexes Main characteristics of Private Limited Liability Companies

Germany (GmbH)

Two-organ structure: shareholder meeting and management board; supervisory board optional; employee codetermination may require mandatory supervisory board

cept for the appointment of a ‘chairman’; certain decisions must be adopted collectively by the shareholders SARL: twoorgan structure: shareholder meeting and manager(s)

Structure

One or more natural or legal persons; formal recording of the formation

Formation

Registration mandatory; own legal personality of the GmbH

Commercial Register

Minimum e 25,000

Share Capital

Notarial shareholder resolution; to be registered with the commercial register

Amendment of articles of association; capital increase/ decrease

Uniform shareholding: equal rights for all shareholders; transfer of shares by notarial agreement; listing at a stock exchange not possible

Mandatory supervisory board with one third/ half employee representatives if more than 500/2000 employees

Employee Co-Determination

to be registered with the commercial register

Sole liability of the GmbH; in principle shareholders are not liable

Liability Regime

change not possible SARL: transfer of shares by written or notarial agreement, with prior approval of the shareholders; listing at a stock exchange not possible

Shares/ transfer/ listing

Currently not possible

Cross-border merger

Currently not possible, cross-border transfer is deemed to be a liquidation

Cross-border transfer of seat

Main characteristics of Private Limited Liability Companies Annexes

897

898

Two-organ structure: members’ Meeting and Managers; Auditors only in the case of large EPE

Two-organ structure: shareholder meeting and board of directors; board of large private limited company must have audit committee or explain why

Greece (EPE)

Ireland (PLC)

Structure

One or more natural or legal persons; delivery of formation documents to Companies Registration Office, which issues Certificate of

One or more natural or legal persons; notarisation of the statutes

Formation

Registration mandatory at the Companies Registration Office; own legal personality of the limited company commences upon issue of Certificate

Registration and publication mandatory; own legal personality of the EPE

Commercial Register

No minimum

Minimum e 18,000

Share Capital

Sole liability of the limited company; in principle shareholders are not liable

Sole liability of the EPE; in principle company members are not liable

Uniform shareholding: equal rights for all company members; transfer of shares by notarial agreement, subject to registration and publication; listing at a Stock Exchange not possible Different classes of shares permitted; no requirement for equal rights for all shareholders; transfer of shares by stock transfer form; listing at a stock

Liability Regime

Shares/ transfer/ listing

None, save in Stateowned companies subject to the Worker Participation (State Enterprises) Acts

None

Employee Co-Determination

Share capital increase – ordinary (50% +1) resolution; amendment to articles – special (75%) resolution; reduction of capital special

Notarial resolution of the members’ Meeting; subject to registration and publication

Amendment of articles of association; capital increase/ decrease

Currently not possible

Currently not possible

Cross-border merger

Currently not possible

Possible only with regard to Greek EPE

Cross-border transfer of seat

Annexes Main characteristics of Private Limited Liability Companies

One or more natural or legal persons; formal recording of the formation

Two-organ structure: shareholder meeting and managing director board; supervisory

Lithuania Uzˇdaroji akcine˙ bendrove˙

Registration mandatory; own legal personality of the UAB

Registration mandatory; own legal personality of the Srl

One or more natural or legal persons; formal recording of the formation

Two-organ structure: shareholder meeting and board of directors; board of statutory auditors optional; board of statutory auditors mandatory with a capital equal to or higher than e 120,000

Italy (Srl)

of Incorporation

Incorporation

not in annual accounts

Commercial Register

Formation

Structure

Minimum e 2,896

Minimum e 10,000

Share Capital

Shareholder resolution; to be notarised and registered with the commercial register

Sole liability of the UAB; in principle shareholders are not liable

Uniform shareholding: equal rights for all shareholders; transfer of shares by

N/A

Notarial shareholder resolution; to be registered with the commercial register

No

Sole liability of the Srl; in principle shareholders are not liable

Amendment of articles of association; capital increase/ decrease

Rights proportionate to the quotaholding; transfer of quotas by simple agreement; listing at a stock exchange not possible

Employee Co-Determination

(75%) resolution and court approval

Liability Regime

exchange not possible

Shares/ transfer/ listing

Currently not possible

Possible

Cross-border merger

Currently not possible

Possible; the company may loose its Italian nationality according to local international private law

Cross-border transfer of seat

Main characteristics of Private Limited Liability Companies Annexes

899

900

Two-organ structure: shareholder meeting and management board; supervisory board optional (mandatory with two-tier companies);

Two (or three) organ structure: shareholder meeting, board of directors. Mandatory corporate assembly if

Netherlands (BV)

Norway (AS)

board and management board optional

Structure

One or more natural or legal persons.

One or more natural or legal persons; formal recording of the formation

Formation

Mandatory registration in the Register for Business Enterprises.

Registration mandatory; own legal personality of the BV

Commercial Register

Minimum NOK 100,000

Minimum e 18,000

Share Capital

Different classes of shares admitted; transfer of shares by simple agreement; listing at a stock

Different classes of shares admitted; equal rights for all shareholders; transfer of shares by notarial agreement; listing at a stock exchange not possible

written agreement; listing at a stock exchange not possible

Shares/ transfer/ listing

Sole liability of AS, the shareholders are in principle not liable.

Sole liability of the BV; in principle shareholders are not liable

Liability Regime

Mandatory corporate assembly if more than 200 employees, where 1/3 of the members are elected by and from among

Workers council possible if more than 35/100 employees

Employee Co-Determination

Currently not possible

Currently not possible.

Shareholder resolution (2/3 majority), to be registered with the Register of Business Enterprises. (The general

Cross-border merger

shareholder resolution; to be registered with the commercial register

Amendment of articles of association; capital increase/ decrease

Currently not possible, the seat must be in Norway.

Currently not possible for statutory seat

Cross-border transfer of seat

Annexes Main characteristics of Private Limited Liability Companies

more than 200 employees.

Structure

Formation

Commercial Register

Share Capital

exchange not possible.

Shares/ transfer/ listing

Liability Regime

the employees. The corporate assembly elect board directors /chairman, whereof up to a third/min 2 of the directors shall be elected from among the employees if demanded by 1/ of the cor3 porate assembly members. AS with more than 30 employees; a majority of the employees may require the election by and among the employees of 1 director/ AS

Employee Co-Determination

meeting may give the board authorization to increase the share capital.)

Amendment of articles of association; capital increase/ decrease Cross-border merger

Cross-border transfer of seat

Main characteristics of Private Limited Liability Companies Annexes

901

Poland (sp. z o. o.)

902

Two-organ or three–organ structure: shareholder meeting and management board mandatory; supervisory board mandatory when more than 25 shareholders and share capital exceeds PLN 500,000

Structure

One or more natural or legal persons; sole shareholder sp. z o.o. cannot establish another sole shareholder sp. z o.o.; formal recording of the formation

Formation

Registration mandatory; own legal personality of the sp. z o. o.

Commercial Register

Minimum PLN 50,000

Share Capital

In principle equal rights of all shareholders; transfer of shares by an agreement with signatures certified by a notary; listing at a stock exchange not possible

Shares/ transfer/ listing

Sole liability of the sp. z o.o.; in principle shareholders are not liable

Liability Regime

No mandatory provisions with this regard

with more than 50 employees, a majority of the employees may require the election by and among the employees of up to 1/ 3/at least 2 directors.

Employee Co-Determination

Notarial shareholder resolution; to be registered with the register court

Amendment of articles of association; capital increase/ decrease

Currently not possible

Cross-border merger

Currently not possible, cross-border transfer is deemed to be a liquidation

Cross-border transfer of seat

Annexes Main characteristics of Private Limited Liability Companies

Two-organ structure: shareholders’ meeting and managing director(s); supervisory board optional

Two-organ structure: shareholder meeting and management board; no optional su-

Slovakia (s.r.o.; spol. s r.o.)

Spain (S.L. / S.R.L.)

Structure

One or more natural or legal persons; formal recording of the formation

One or more natural or legal persons (s.r.o. with a sole shareholder cannot be a sole founder or sole shareholder of another s.r.o., a natural person may be sole shareholder in max. three s.r.o.s); formal recording of the formation

Formation

Registration mandatory; own legal personality of the S.L.

Registration mandatory

Commercial Register

Minimum e 3,005. 06

Minimum cca e 5,150 (SKK 200,000)

Share Capital

Liability Regime

Sole liability of s.r.o., shareholders are liable for obligations of the company only up to the limit of their nonpaid investment contributions (until the pay off is registered into the commercial register)

Sole liability of the S.L.; in principle shareholders are not liable

Shares/ transfer/ listing

Each shareholder may own only one ownership interest, equal rights for all shareholders unless otherwise stipulated in corporate documents; transfer of shares by simple agreement with signatures verified by a notary public; listing at a stock exchange not possible No uniform shareholding necessary required: shares could engage different rights

No strictly employee supervisory structures: only consultancy boards (“comit de empresa”)

None

Employee Co-Determination

Notarial shareholder resolution; to be registered with the commercial register

Shareholder resolution and registration with the commercial register required in both cases; amendments to articles of association become effective upon resolution (with exceptions), increase/decrease of registered capital upon registration

Amendment of articles of association; capital increase/ decrease

Possible

Currently not possible

Cross-border merger

Possible

Possible if permitted by international treaty or European law

Cross-border transfer of seat

Main characteristics of Private Limited Liability Companies Annexes

903

904

Switzerland (GmbH, Srl, Sagl)

One to twoorgan structure: shareholder meeting and, if different from shareholders, management

pervisory board optional; no employee codetermination

Structure

Two or more natural or legal persons; formal recording of the formation

Formation

Registration mandatory; own legal personality of the GmbH

Commercial Register

Minimum CHF 20’000; maximum CHF 2’000’000

Share Capital

Uniform shareholding: equal rights for all shareholders; transfer of shares requires approval of the shareholder meeting (3/4 quorum) and notarial assignment; listing at a stock exchange not possible

and obligations to its respective shareholders; transfer of shares by notarial agreement; listing at a stock exchange not possible

Shares/ transfer/ listing

Sole liability of the GmbH; in principle shareholders are not liable (unless so stipulated in articles of association)

Liability Regime

None

Employee Co-Determination

Notarial shareholder resolution; to be registered with the commercial register

Amendment of articles of association; capital increase/ decrease

Possible under certain conditions

Cross-border merger

Possible under certain conditions

Cross-border transfer of seat

Annexes Main characteristics of Private Limited Liability Companies

Three-organ structure: shareholder meeting, management board and supervisory board

Shareholders and board of directors

Czech Republic (a. s.; akc.spol.)

England (Plc)

Structure

Minimum 2 shareholders, minimum 2 directors, company se-

One or more legal persons; only two or more natural persons, however if a single natural person acquires all shares the company does not cease to exist; formal recording of the formation

Formation

Details of directors, secretary, initial shareholders and

Registration mandatory

Commercial Register

Minimum £50,000 in share capital (of which £12,500

Minimum e 70,000, if founded by a public offering e 670,000

Share Capital

Main characteristics of Public Limited Liability Companies

Limited liability of shareholders, personal liability of directors

Sole liability of a. s., no liability of shareholders

Different classes* of shares admitted; transfer of shares by simple agreement (endorsement & hand-over / *registration); listing at a stock exchange possible

Company must have authority to issue new shares and

Liability Regime

Shares/ transfer/ listing

None

One third of the supervisory board to be elected by employees if the company has more than 50 employees

Employee Co-Determination

Need shareholder resolutions to amend articles and to

Shareholder resolution in the form of a notarial deed and registration into the commercial register required in both cases, Amendments to articles of association become effective upon resolution (with exceptions), increase/decrease of registered capital upon registration

Amendment of articles of association; capital increase/ decrease

Not possible

Currently not possible

Cross-border merger

Not possible

Possible if permitted by international treaty or European law

Cross-border transfer of seat

Main characteristics of Public Limited Liability Companies Annexes

905

Estonia (AS)

906

Three-organ structure: shareholder meeting, management board and supervisory board

Structure

Registration mandatory, own legal personality of the AS

new share issues to be filed at Companies House; annual returns and accounts to be filed

cretary to have certain qualifications

One or more natural or legal persons; memorandum of association must be concluded and the articles of association signed.

Commercial Register

Formation

Minimum 400,000 Estonian kroons (approx 25,641 EUR)

must be paid up)

Share Capital

Two different classes of shares allowed; transfer of shares by simple agreement, shares are entered in the Estonian Central Register of Securities; listing at a stock exchange possible.

statutory pre-emption rights on issue (can be disapplied). Can list a plc

Shares/ transfer/ listing

Sole liability of the AS; in principle shareholders are not liable

for breach of fiduciary duty or wrongful or fraudulent trading or in respect of certain breaches of Companies Act

Liability Regime

No employee co-determination

Employee Co-Determination

The amendment of articles of association or reduction or increase of share capital must be registered with the commercial register

increase capital. Directors can issue new shares if duly authorised. Capital cannot be repaid except in very limited circumstances

Amendment of articles of association; capital increase/ decrease

Currently not possible

Cross-border merger

Currently not possible

Cross-border transfer of seat

Annexes Main characteristics of Public Limited Liability Companies

Two or threeorgan structure : general meeting of shareholders and a) onetier board (only one administrative organ) or b) two-tier board (one supervisory organ and one management organ)

Two or threeorgan structure : shareholder meeting and board of directors; or shareholder meeting, management board, super-

EU (SE)

France (SA)

Structure

Seven or more natural or legal persons; formal recording of the formation

Four scenarios: Merger, Holding SE, Subsidiary SE, Transformation; formalities are governed by the laws of the Member State in which the SE is registered

Formation

Registration mandatory; own legal personality of the SA

Registration/ publication mandatory; own legal personality of the SE

Commercial Register

e 225,000

Minimum

Minimum e 120,000

Share Capital

Liability Regime

Sole liability of the SE; in principle shareholders are not liable

Sole liability of the SA; in principle shareholders are not liable

Shares/ transfer/ listing

All formalities concerning shares are governed by the laws of the Member State in which the SE is registered

Different classes of shares admitted; transfer of shares by simple agreement; listing at a stock exchange possible

Compulsory only in stateowned SA or when employees own more than 3% of the shares

Depending on the companies involved in the formation

Employee Co-Determination

Exclusive competence of the extraordinary general meeting (two-thirds majority) Modification to be registered with

Formalities for the amendment of the articles and change of capital are governed by the laws of the Member State in which the SE is registered; registration/ publication of amendments/capital changes is mandatory

Amendment of articles of association; capital increase/ decrease

Currently impractical

Possible

Cross-border merger

Unanimous consent required; SA is dissolved unless a convention is in place between France and the new host country

Possible

Cross-border transfer of seat

Main characteristics of Public Limited Liability Companies Annexes

907

908

Three-organ structure: shareholder meeting, management board and supervisory board

Three-organ structure: General Meeting of shareholders, Board of Directors and Auditors

Germany (AG)

Greece (AE)

visory board optional

Structure

At least two natural or legal persons; notarisation of the statutes; administrative approval, if share capital more than e300,000

One or more natural or legal persons; formal recording of the formation

Formation

Minimum

Registration mandatory; own legal personality of the AE e 60,000

Minimum e 50,000

Share Capital

Registration mandatory; own legal personality of the AG

Commercial Register

Different classes of shares admitted; transfer requirements vary depending on whether the shares are listed at a Stock Exchange or not

Different classes of shares admitted; transfer of shares by simple agreement; listing at a stock exchange possible

Shares/ transfer/ listing

Sole liability of the AE; in principle shareholders are not liable

Sole liability of the AG; in principle shareholders are not liable

Liability Regime

Only in the case of AE, which are under the majority control of the Greek State (public sector AE)

One third/ half employee representatives if more than 500/2000 employees

Employee Co-Determination

Resolution of General Meeting of shareholders, subject to administrative approval, registration and publication

Notarial shareholder resolution; to be registered with the commercial register

the commercial register

Amendment of articles of association; capital increase/ decrease

Currently not possible

Currently not possible

Cross-border merger

Possible only with regard to Greek AE

Currently not possible, cross-border transfer is deemed to be a liquidation

Cross-border transfer of seat

Annexes Main characteristics of Public Limited Liability Companies

Two-organ structure: shareholder meeting and board of directors; PLC board must have audit committee

Three-organ structure: shareholder meeting, board of directors and board of statutory auditors; alternative systems of corporate governance:

Ireland (PLC)

Italy (Spa)

Structure

One or more natural or legal persons; formal recording of the formation

Seven or more natural or legal persons; delivery of formation documents to Companies Registration Office, which issues Certificate of Incorporation

Formation

Registration mandatory; own legal personality of the Spa

Registration mandatory at the Companies Registration Office; own legal personality of the PLC commences upon issue of Certificate of Incorporation

Commercial Register

Minimum e 120,000

Minimum e 38,092.14; PLC cannot trade before this is verified and trading certificate issued

Share Capital

Liability Regime

Sole liability of the PLC; in principle shareholders are not liable

Sole liability of the Spa; in principle shareholders are not liable

Shares/ transfer/ listing

Different classes of shares permitted; no requirement for equal rights for all shareholders; transfer of shares by stock transfer form; listing at a stock exchange possible

Different classes of shares admitted; transfer of shares by simple agreement; listing at a stock exchange possible

No

None, save in Stateowned companies subject to the Worker Participation (State Enterprises) Acts

Employee Co-Determination

Notarial shareholder resolution; to be registered with the commercial register

Share capital increase – ordinary (50% +1) resolution; amendment to articles – special (75%) resolution; reduction of capital special (75%) resolution and court approval

Amendment of articles of association; capital increase/ decrease

Possible

Currently not possible

Cross-border merger

Possible; the company may loose its Italian nationality according to local international private law

Currently not possible

Cross-border transfer of seat

Main characteristics of Public Limited Liability Companies Annexes

909

910

Two-organ structure: shareholder meeting and managing director; management board and supervisory board not mandatory

Two-organ structure: shareholders meeting and management board; supervisory board optional or

Lithuania Akcine˙ bendrove˙

Netherlands (NV)

monistic and dualistic sytem

Structure

One or more natural or legal persons; formal recording of the formation

One or more natural or legal persons; formal recording of the formation

Formation

Registration mandatory; own legal personality of the NV

Registration mandatory; own legal personality of the AB

Commercial Register

Minimum e 40,000

Minimum e 43,443

Share Capital

Sole liability of the AB; in principle shareholders are not liable

Sole liability of the NV; in principle shareholders are not liable

Different classes of shares admitted; transfer of shares by simple agreement (except if shares are

Liability Regime

Uniform shareholding: equal rights for all shareholders (except for preference shares which may or may not have voting right); transfer of shares by simple agreement; listing at a stock exchange possible

Shares/ transfer/ listing

Workers council possible if more than 35/100 employees.

N/A

Employee Co-Determination

shareholders’ resolution; to be registered with the commercial register

Shareholder resolution; to be notarised and registered with the commercial register

Amendment of articles of association; capital increase/ decrease

Currently not possible

Currently not possible

Cross-border merger

Currently not possible for statutory seat

Currently not possible

Cross-border transfer of seat

Annexes Main characteristics of Public Limited Liability Companies

Norway (ASA)

Two (or three) organ structure: shareholder meeting, board of directors. Mandatory corporate assembly if more than 200 employees.

mandatory with two-tier structures

Structure

One or more natural or legal persons.

Formation

Mandatory registration in the Register for Business Enterprises.

Commercial Register

Minimum NOK 1,000,000.

Share Capital

Different classes of shares admitted; transfer of shares by simple agreement; listing at a stock exchange possible.

not bearer shares); listing at a stock exchange possible

Shares/ transfer/ listing

Sole liability of ASA, the shareholders are in principle not liable.

Liability Regime

Mandatory corporate assembly if more than 200 employees, where 1/ of the 3 members are elected by and from among the employees. The corporate assembly elect board directors /chairman, whereof up to a third/min 2 of the directors shall be elected from among the employees if

Employee Co-Determination

Shareholder resolution (2/3 majority), to be registered with the Register of Business Enterprises. (The general meeting may give the board authorization to increase the share capital.)

Amendment of articles of association; capital increase/ decrease

Currently not possible

Cross-border merger

Currently not possible, the seat must be in Norway

Cross-border transfer of seat

Main characteristics of Public Limited Liability Companies Annexes

911

Structure

Formation

Commercial Register

Share Capital

Shares/ transfer/ listing

Liability Regime

912 demanded by a third of the corporate assembly members. ASA with more than 30 employees, a majority of the employees may require the election by and among the employees of 1 director/ ASA with more than 50 employees, a majority of the employees may require the election by and among the employees of up to 1/3/at least 2 directors

Employee Co-Determination

Amendment of articles of association; capital increase/ decrease Cross-border merger

Cross-border transfer of seat

Annexes Main characteristics of Public Limited Liability Companies

Three-organ structure: shareholder meeting, management board and supervisory board

Three-organ structure: general meeting of shareholders, board of directors and supervisory board

Poland (S. A.)

Slovakia (a. s.; akc.spol.)

Structure

One or more legal persons; only two or more natural persons, however if a single natural person acquires all shares, the company does not cease to exist; formal recording of the formation

One or more natural or legal persons; except that sole shareholder sp. z o. o. cannot establish S. A.; formal recording of the formation

Formation

Registration mandatory

Registration mandatory; own legal personality of the S. A.

Commercial Register

Minimum (cca) e 25,000

Minimum PLN 500,000

Share Capital

Sole liability of the S. A.; the shareholders are not liable

Sole liability of a. s.; no liability of shareholders

Different classes* of shares admitted; transfer of shares by simple agreement (endorsement & hand-over / *registration); listing at a stock exchange possible

Liability Regime

Different classes of shares admitted; transfer of shares by simple agreement; listing at a stock exchange possible

Shares/ transfer/ listing

One third of the supervisory board to be elected by employees if the company has more than 50 employees

No mandatory provisions with this regard

Employee Co-Determination

Shareholder resolution in the form of a notarial deed and registration with the commercial register required in both cases; amendments to articles of association become effective upon resolution (with exceptions), in-

Notarial shareholder resolution; to be registered with the register court

Amendment of articles of association; capital increase/ decrease

Currently not possible

Currently not possible

Cross-border merger

Possible if permitted by international treaty or European law

Currently not possible, cross-border transfer is deemed to be a liquidation

Cross-border transfer of seat

Main characteristics of Public Limited Liability Companies Annexes

913

Spain (S. A.)

914

Two-organ structure: shareholder meeting and management board. No supervisory, employee co-determination boards

Structure

One or more natural or legal persons; formal recording of the formation

Formation

Registration mandatory; own legal personality of the S. A.

Commercial Register

e 60,000

Minimum

Share Capital

Liability Regime

Sole liability of the S. A.; in principle shareholders are not liable

Shares/ transfer/ listing

Different classes of shares admitted; transfer of shares requires to comply with certain formalities although no notarial agreement is strictly required; listing at a stock exchange possible No strictly employee supervisory structures: only consultancy boards (“comit de empresa”)

Employee Co-Determination

Notarial shareholder resolution; to be registered with the commercial register

crease/ decrease of registered capital upon registration

Amendment of articles of association; capital increase/ decrease

Possible

Cross-border merger

Possible

Cross-border transfer of seat

Annexes Main characteristics of Public Limited Liability Companies

Switzerland (AG, SA, SA)

Two-organ structure: shareholder meeting and board of directors

Structure

Three or more natural or legal persons; formal recording of the formation

Formation

Registration mandatory; own legal personality of the AG

Commercial Register

Minimum CHF 100’000

Share Capital

Different classes of shares permissible; transfer of shares by simple agreement (endorsement), as per articles of association, consent of board of directors to transfer may be required; listing at a stock exchange possible

Shares/ transfer/ listing

Sole liability of the AG; in principle shareholders are not liable

Liability Regime

None

Employee Co-Determination

Notarial shareholder/ board resolution; to be registered with the commercial register

Amendment of articles of association; capital increase/ decrease Possible under certain conditions

Cross-border merger

Possible under certain conditions

Cross-border transfer of seat

Main characteristics of Public Limited Liability Companies Annexes

915