sou · GLB322d1 · 1998-01-01 00:00:00 — According to the proposal, the provisions on increases in share capital will be covered in one chapter for bonus issues and one for additional issues. These chapters are preceded by a chapter on the shared provisions for increases in share capital. Today when a warrant is issued, it must be linked to a debt instrument. There is no practical significance to this provision, however. A company can issue warrants that are linked to debt instruments with a low, almost symbolic value. The link can also be circumvented by prescribing in the issues conditions that the option can be separated from the debt instrument immediately after issue. rule that can be sidestepped this easily is not worth retaining, in the opinion of the Committee. At the same time, a practical need for separate warrants has arisen. is therefore proposing to abolish the requirement that there be a link between the option right and the debt instrument. According to current law, in a cash issue by a company whose restricted equity amounts to one million kronor prior to the issue, it is enough that half the issue amount has been paid in at the time the issue is registered. The remaining amount must be paid in within six months of the registration. Provisions on the registration of share capital in two installments have been added due to the fact that large Swedish companies occasionally turn to foreign capital markets for risk capital. A large new issue on the or stock exchanges, for example, can take a long time to complete. It has been suggested that it is unfair that the company is not able to register such a capital increase until all the new shares have been paid for. However, it would be wrong in principle that a company can be registered with a share capital that is greater than has actually been paid in. Demands for a speedy registration process for equity increases that have already been made can be met in better fashion, in the opinion of the Committee, by giving companies the right to register the increased amount over time, as the newly issued shares are paid for. is therefore proposing to abolish the provisions on the registration of increases before shares have been paid for and replace them with a provision that makes it possible to register a new issue over time. The law (1987:464) on certain direct placements by stock market companies, etc. (the law) places higher majority requirements than the Companies Act on resolutions on certain issues that are directed to, among others, the company management and persons of close standing. The gap between the laws has been reduced due to the harmonization in 1995 of the Companies Act to the regulations of the EU. The harmonization resulted in, among other things, a requirement that a qualified majority be introduced in the Companies Act to pass resolutions on deviations from the preferential right of subscription for new shares of the shareholders. The majority requirement in the Companies Act is still lower than in the law, however. Act requires that a resolution on a new issue is supported by two-thirds of the votes cast and the shares represented at the general meeting. This is the same majority required to pass resolutions on changes in the articles of association that do not affect the legal relationship between the shares already outstanding. This can be compared with the laws majority requirement: nine-tenths of the votes cast and the shares represented at the general meeting. In the opinion of the Committee, the laws majority requirement has served as an effective deterrent to the misuse of the rules on the deviation from the preferential right of the shareholders to benefit persons in management positions in the company or group. therefore does not feel that the provisions should be abolished. It is proposing certain amendments, however, in order to overcome some of the practical drawbacks of the current regulations. In addition, it is proposing that the special law be abolished and that its provisions be transferred to the Companies Act, the Banking Business Act and the Insurance Business Act. When a public company or a shareholder of such a company publicly offers or otherwise invites a substantial number of persons to acquire shares or subscription rights in the company, the board of directors, pursuant to the provisions of the Companies Act, must draw up a prospectus if the total amount which may be paid as a result of the offer is not less than ,000. Provisions on prospectuses are found, in addition to the Companies Act, in the Act on Trading in (1991:980). With regard to securities that are registered or intended to be registered on the stock exchange, the provisions on prospectuses can be found in the Act (1992:543), among other places. Both acts are complemented by the Financial Supervisory Authoritys regulations on prospectuses. feels that it is unfortunate that companies and shareholders who intend to issue or sell securities should have to comply with prospectus rules in several different laws. It is therefore proposing that the provisions on prospectuses in the Companies Act be abolished and replaced by similar provisions in the Act on Trading in and the Act. Act contains a restriction against raising certain types of cash loans. Unless otherwise stipulated in the provisions on convertible loans, a company may not raise a cash loan on terms that require that it be repaid with other than a nominal cash amount or a cash amount determined with reference to monetary fluctuations. On the other hand, companies are permitted to raise loans against bonds or other debt instruments that carry the right to interest, the amount of which is dependent or in part on the dividend paid to the shareholders of the company or the companys profit. The decision to raise a participating loan of this type is made by the general meeting or, with the authorization of the general meeting, by the board of directors. The former type of loan, which must be repaid other than in cash or a nominal cash amount, may assure creditors the right to payment from the companys assets in the event of the companys winding-up or dissolution. The amount of that payment may, for example, be based on a certain percentage of the companys assets or it could be calculated as the average market price of its shares during a period prior to the termination of the loan or the winding-up. The restriction against such loans is generally seen as a stumbling block preventing Swedish companies from raising loans on the same terms as are common in the countries usually compares itself with. It is also important to note that the Companies Act accepts certain other very risky loans, such as convertible debentures, the interest on which is set in relation to the companys dividend. In addition, a number of other financial instruments have been developed in recent years and are traded on the capital market despite that they obviously entail major risks that are difficult to assess. is therefore proposing that loans that are not repaid in cash or a nominal cash amount again be permitted. This means that these loans and participating loans will be treated equivalently. Reductions in share capital Reductions to repay shareholders or for the purpose of transfers to a legal or unrestricted reserve today may only be decided on following a proposal or approval by the board of directors. This corresponds to the rules that apply to the distribution of dividends and relates back to the fear that shareholders will try to push so hard to demand dividends or a return on their capital that it could jeopardize the companys continued existence and the jobs of its employees. differently at the distribution of roles between shareholders and the board, feels that the efficient use of business resources over the long term is best promoted by having the general meeting, without a veto right for the board, decide how much capital should be tied up in the company. is therefore proposing that the provisions on the boards veto right be abolished. The proposed regulation also includes provisions that make it possible to reduce share capital to cover a loss without summoning the companys creditors, regardless of whether the loss is indicated in the most recently adopted balance sheet or has arisen during the year. A company must be able to reduce its share capital to a level that provides the best return for the shareholders on the capital they have invested. Today it is required to have full coverage for restricted equity after the reduction. This requirement must be retained, in the Committees opinion, as must a regulation that a resolution on a reduction may not be effected without special consent. is proposing, however, that the opportunities for a reduction without consent be expanded to apply not only as they do today when a reduction is combined with a new issue, but also, for example, to reductions combined with conversions or subscriptions through the exercise of warrants. Bonus issues through transfers from non- restricted equity to share capital should also exempt the company from having to seek consent before effecting a reduction decision. On the whole, the Committee feels that it is enough that a company shows that the size of its registered share capital and restricted equity have remained unchanged when the reduction resolution and other decisions that were registered at the same time are recorded in the Companies Registry. After the share capital has been reduced to cover a loss in accordance with the adopted balance sheet, there is currently a three- year waiting period during which the company may not distribute dividends without the permission of the court. The interests of creditors are taken into account in such a way that those who wish to contest a dividend disposition have the right to payment in full or satisfactory security for their claims. is not convinced of the value of this restriction on the right to distribute dividends after a reduction in share capital. Act does not contain any rules that a company must have share capital that corresponds to its total assets or the risks inherent in the companys business. A rule that limits a companys right to distribute dividends after a reduction would seem contradictory, regardless of the level from which the reduction was made and whether or not the company, after the reduction, can be considered to be undercapitalized. feels that the general provisions on distributions of dividends are also sufficient after a reduction in share capital and proposes that the three-year waiting period be abolished. The repurchase and sale of a companys own shares A Swedish company may not repurchase or in any other way acquire its own shares. The Swedish rules on companies acquisitions of their own shares are more restrictive than those of most other countries. The Committees review of the laws in other countries shows that all the EU member states currently allow share repurchases under the conditions set forth in the . In the U.S., share repurchases are permitted within the framework of company laws on the distribution of dividends. The main argument for allowing Swedish companies to repurchase their own shares is, in the opinion of the Committee, that it can improve the opportunities afforded them to return surplus capital to their shareholders and in that way contribute to the more efficient use of the resources of the company and Swedish business as a whole. If the owners can use the money in a way that generates a higher return than the company can produce through its own management, the money should be returned to the owners. Swedish business is extremely eager to have the same opportunities to repurchase their shares as in most other countries usually compares itself with. is sympathetic to these wishes. We cannot disregard the fact that companies in neighboring countries generally are able to repurchase their shares. It would appear to be a disadvantage for Swedish companies in international competition not to have the opportunity to repurchase their shares in order to more effectively use their capital and gain access to a convenient means of payment for acquisitions of companies and other property. With respect to public companies, a relaxation of the restriction against share repurchases must be implemented within the framework of the . The directive stipulates, among other things, that if share repurchases are permitted, they may done only within the framework of the companys non-restricted equity and that the companys total holding of its own shares may not exceed ten percent of all the shares in the company. It also requires that the decision to repurchase shares be made by the general meeting or, with the authorization of the meeting, by the board of directors. feels that the directives restrictions are necessary but not sufficient. Share repurchases are similar to the opportunities already afforded companies to reduce their share capital to repay shareholders. The sale of repurchased shares can also be compared with a new issue. It is natural therefore that the decision by a company to repurchase and sell its own shares should follow largely the same routines as decisions to reduce or increase share capital. This means, among other things, that a two-thirds majority of the votes of the general meeting is required for such a resolution to pass, that the meeting has access to the same information for its decision as it does in the case of reductions in share capital and that the proposed resolution is announced to the shareholders a specific period prior to the meeting. The similarity between the sale of repurchased shares and a new issue means that the resolution on a sale must pass with the same majority as a resolution on a new issue and that the shareholders have a preferential right to acquire the shares in question. If the shares are to be sold on the market, the same decision-making rules must be followed as for a direct placement. These decision-making rules, together with the requirements of the EU company law directive, in essence should fulfill the protection requirements of company law that must be met for the repurchase and sale of a companys own shares. However, the rules are not an effective safeguard to prevent companies from purchasing and selling their own shares to directly influence their share prices in such a way that could cause the public to lose its confidence in the stock market. A relaxation of the restriction against share repurchases should therefore only be considered if rules are also introduced in securities and company law that minimize the risk of manipulating share prices. A special regulation in the Act on Trading in recently criminalized attempts to wrongfully influence share prices. If companies are permitted to repurchase and sell their own shares, such actions, to the extent they lead to manipulation of share prices, would also be illegal. Despite this, the Committee feels there is no way to avoid introducing special provisions in securities and company law to minimize the opportunities to manipulate share prices particularly in the repurchase and sale of a companys own shares. is therefore proposing that the Act on Trading in be amended to include a provision stating that the government or, with the governments authorization, the Financial Supervisory Authority may institute more detailed regulations on the rules the stock exchange and authorized marketplaces shall follow with respect to trading by companies in their own shares. In order to fulfill the requirement on the proper release of information to the market, the Committee is also proposing that the Act on Trading in be amended to include a provision whereby Swedish or foreign stock market companies that purchase or sell their own shares must notify the in the prescribed by the government or, with the governments authorization, the Financial Supervisory Authority. Lastly with respect to private companies, the Committee is proposing that a companys decision to buy its own shares may be made only by the general meeting. There is no need, in the opinion of the Committee, to permit the board of directors to be authorized to make such a decision. The requirement of a two-thirds majority should also apply in the case of private companies. A strong reason for allowing private companies to repurchase their own shares is to facilitate changes in ownership. This may require that the company can repurchase a significant portion of its own shares. As a result, the limit of ten percent of the total number of shares that the mandates for public companies should not apply to private companies. On the other hand, the compensation these companies pay for the shares should meet the same guidelines with respect to non-restricted equity. Also in the case of private companies, the decision to transfer their own shares that they have acquired should be made with consideration to the provisions on new issues. is proposing an express restriction preventing companies from selling repurchased convertibles and warrants. Redemption of minority shares is proposing a completely new chapter on the redemption of minority shares. The chapter completely changes how the procedure is regulated. Among other things, it proposes that parties who are displeased with an arbitration judgment may bring action before the of Appeal. This would shorten the judicial process compared with today. Cases involving compulsory redemptions would thereby be concentrated within a single court, which would have more experience with these types of cases. If a parent company alone or together with one or more subsidiaries owns more than nine-tenths of the shares representing more than nine- tenths of the votes of all the shares in a subsidiary, the parent company currently has the right to redeem the remaining shares from the other shareholders of the subsidiary. Those who own shares which may be redeemed have the right to have those shares redeemed by the parent company. By parent company in this case is meant a Swedish company. is proposing that every shareholder – together with their subsidiaries if applicable – who owns more than nine-tenths of the shares in a company shall have the right and the obligation to redemption. The purpose of these changes is partly to strengthen the protection afforded minority shareholders and partly to make the redemption rules applicable even in an international context. Thus, the new rules do not require that the majority owner is a Swedish company or that there be a group relationship at all. In the opinion of the Committee, compulsory redemptions are so similar to expropriative actions that the legislation on compulsory redemptions must fulfill the requirements stipulated in chapter 2, § 18 of the Constitution . That paragraph states that compensation must be determined in accordance with the principles decreed by law. Because of the expropriative nature of the compulsory redemption rules, the compensation paid to minority owners should be determined, in the opinion of the Committee, on the basis of the same fundamental principle of compensation value that has applied for years in expropriation law. This means that the minority shareholders wealth after a compulsory redemption should be the same had such a redemption not taken place. With respect to the methods for valuating minority shares, the Committee has found no reason to deviate from the stance taken by the Supreme Court for detailed reasons in its judgment in the so-called Balken case (NJA, Nytt Juridiskt Arkiv, an annual publication containing the rulings of the Supreme Court, 1996 p. Consequently, the redemption amount should be determined on the basis of the value the shares have in the owners hands. This should correspond to the market price if the share is listed on a stock exchange or is otherwise subject to market trading that involves regular quotations, or in other cases on the price that can be calculated for a sale under normal conditions. With respect to shares that are not publicly listed, and for which a market price often cannot be determined, the sales price may be calculated on the basis of the companys income or financial position. The principle that shares that are listed or are otherwise market- traded should be valued at their market price cannot be applied without exception. The value of the share price as a reliable measure must be open to interpretation. There must be a special reason, however, why an arbitrator would need to determine another value. One such a reason might be that the share price has been manipulated, and another that a listed share is traded so infrequently that its listed price cannot be considered a reasonable measure of its value. It is not possible, however, to specify every single case in which a listed price can be disregarded. Ultimately, legal doctrine and case law will have to determine when it might be justified. Simply because a valuation of the company's assets leads to a higher share value than the market price is not reason enough not to value the shares on their listed price. Compulsory redemptions in public companies are preceded as a rule by public takeover offers. In the opinion of the Committee, the fact that a takeover offer is accepted by holders of a very large number of shares is a strong enough indication that the price offered is a reasonable measure of the shares value that it should be disregarded only under special circumstances. is therefore proposing that if a redemption action is preceded by a public takeover offer that is accepted by holders of at least nine-tenths of the shares encompassed by the offer, the redemption amount should correspond to the compensation offered unless there are special reasons otherwise. The question of the right time of valuation is considered to be so important that a rule on it should be stated in law. In the case, NJA 1992 p. 872, the Supreme Court declared that the redemption amount in a compulsory redemption shall be determined on the basis of the shares value at the time a request is filed to have the dispute reviewed by arbitrators. It would not be appropriate, however, to have this date serve as the right time of valuation without exception. For example, a majority shareholder may attempt to exploit his position prior to an impending redemption proceeding to transfer valuable assets from the company at a discounted price to another company he is closely associated with. is therefore proposing that the arbitrators be allowed to determine the shares sales price at a point in time earlier than the date a request was filed to have the dispute reviewed. The issue of mandatory bids in the Swedish stock market Part of the assignment charged to the Committee is to evaluate whether the Swedish stock market should introduce a legislated, so-called mandatory bid rule. By mandatory bid is meant the obligation on the part of those who have acquired a certain percentage of the shares in a company to offer to buy the remaining shares as well. The main argument that has been made in Swedish and international debates to support the introduction of mandatory bids is that a companys minority shareholders should have a possibility to get out of a company in connection with a change in controlling ownership. Such a change, it is felt, with it the risk that the value of the companys share will fall, because of which those owners who are displeased should be able to get out of the company on the same conditions as those who have sold their shares to the majority owner.