m COMMISSION OF THE EUROPEAN COMMUNITIES 
COM(90) 631 final-SYN 317 
Brussels, 13 December 1990 
Proposal for a 
COUNCIL DIRECTIVE 
amending Directive 77/91/HE 
on the formation of ptbl ic I imited I iabi I ity ccmpani 
and thB maintenance and alteration of their capital 
(presented by the Commission) 
"** 
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EXPLANATORY MEMORANDUM 
i • Genera 1 _jccna..l dor at lona 
1. The Second Council Directive on company law of 13 December 1977 
(77/91/EEC)1 harmonizes the safeguards required by Member States of 
companies in respect of the formation of public limited liability 
companies and the maintenance and alteration of their capital, with 
a view to making such safeguards equivalent. 
In order to protect the Interests both of shareholders and of third 
parties, the Directive provides that it should be possible for any 
Interested person to acquaint himself with the basic particulars of 
a company at the time of its incorporation, Including the exact 
composition of its capital. The Directive also makes provision for 
maintaining the subscribed capital and ensuring minimum equivalent 
protection for shareholders and creditors in the event of an 
Increase or reduction of that capital. 
To ensure that the subscribed capital is maintained, the Directive 
prohibits the distribution of dividends to shareholders In the 
absence of net profits and restricts the right of a company to 
acquire its own shares. 
2. In this connection, it lays down more particularly the conditions 
under which Member States' laws may authorize companies to acquire 
their own shares. Thus with the twofold aim of ensuring maintenance 
of the subscribed capital and guaranteeing respect for the principle 
of equal treatment for all shareholders, the Second Directive 
Imposes restrictions of both a procedural and a substantive nature. 
It also spells out the consequences of such transactions. 
3. From the procedural point of view, it is for the general meeting to 
authorize proposed acquisitions and determine the terms and 
conditions thereof, including the duration of the period for which 
the authorization Is given, which may not exceed 18 months 
(Article 19(1)(a)). However, the Directive allows Member States to 
derogate from the principle of authorization by the general meeting 
"where the acquisition of a company's own shares is necessary to 
prevent serious and imminent harm to the company" (Article 19(2). 
In such a case, the decision may be taken by the company's board, 
which must subsequently Inform the general meeting thereof. 
Whichever organ is competent to take decisions in relation to the 
transactions in question, a number of substantive restrictions are 
also imposed. A public limited liability company may under no 
circumstances acquire its own shares In excess of 10% of the 
subscribed capital, and only fully paid up shares may be included In 
the transaction (Article I9(1)(b) and (d)). Moreover, the Directive 
1 OJ L 26, 31.1.1977, p. 1-13. 
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stipulates that the voting rights attached to the shares acquired by 
the company must be suspended (Article 22(1)). Lastly, the 
transaction must be mentioned in the company's annual report 
(Article 22(2)). 
4. All the above rules apply not only to acquisitions made by the 
public limited liability company itself, but also to those made by a 
person acting In his own name but on the company's behalf. 
On the other hand, the Directive does not apply to acquisitions by a 
subsidiary. But it is entirely feasible that, by virtue of its 
power of control, a company might use a subsidiary to acquire its 
own shares, thereby circumventing the safeguards provided for in the 
Second Directive. In view of this gap in Community law, national 
laws continue to deal with this matter In a variety of ways. 
5. The lack of Community rules on the subject has also raised questions 
In connection with the Commission's declared policy of removing 
obstacles to takeover bids. 
It should be stressed-that the Commission's aim in removing such 
obstacles is not to encourage takeover bids as ends In themselves. 
The Commission's standpoint is rather that, In general, takeover 
bids may be viewed in a positive light In so far as they encourage 
the selection by market forces of the most competitive companies and 
the restructuring of European companies, indispensable as this Is to 
meeting international competition. In this context, the 
opportunities for acquiring companies must be broadly similar from 
one Member State to another. 
6. In several Member States, however, takeover bids resisted by the 
board of the target company (hostile bids) have no chance of 
success, owing to the defensive measures which the company's board 
can take under national law to ensure that control of the company 
remains in the hands of "friendly" shareholders. 
7. In Its communication to the Council of 10 May of this year,2 the 
Commission outlined the measures it intends putting forward with a 
view to removing obstacles to takeover bids. 
8. The purpose of the measures is, generally speaking, to attain a 
higher degree of democracy In companies and increase shareholder 
Involvement In company life. This strengthening of the power of 
shareholders is of particular importance In the context of a 
takeover bid as these new measures will ensure that the outcome of 
the bid Is decided by all shareholders acting Independently and with 
full knowledge of the facts. 
2 SEC(90) 901 final, 10.5.1990, 
- 4 
9. The proposed measures cover two categories of obstacle. The first 
category concerns the voting rights of shareholders, and the second 
the maintenance of company capital. 
10. The obstacles relating to the exercise of shareholders' voting 
rights will, for their part, be dealt with In the amended proposal 
for a Fifth Directive, which already contains Important provisions 
on the subject. However, with a view to strengthening the position 
of shareholders with regard to the exercise of their voting rights, 
those provisions need to be amended in several respects. A new text 
amending the proposal for a Fifth Directive along those lines has 
accordingly been drawn up. 
11. The capital maintenance aspect Involves obstacles linked to the 
acquisition by a company of Its own shares. By such means the 
company seeks to shield a certain proportion of its subscribed 
capital from a hostile bidder and freeze the voting rights attached 
thereto with a view to frustrating the bid. 
12. Firstly, mention must be made of -the right to derogate under 
certain condit Ions from_ the p.r inc I pie of the authorization of the 
general meeting, which allows the board of a company to acquire up 
to 10% of the subscribed capital without any intervention by the 
shareholders, the addressees of the bid. 
13. it Is therefore necessary to no longer allow recourse to be had to 
this derogation for any acquisition of own shares during the 
takeover bid period. In this connection, It was made clear when the 
Thirteenth Council Directive, concerning takeover bids,3 was 
amended that Article 8 thereof, which requires the board to refrain 
from taking certain defensive measures while a bid Is open, applies 
also to the acquisition of the company's own shares. Hence, 
notwithstanding Article 19(1)(a) and (2) of the Second Directive, 
such an acquisition is subject to the authorization of the general 
meeting, which must be given during the period for acceptance of the 
bid. 
14. The second facet is that of the possibility for shares In a parent 
company to be acquired by Its subsidiaries. 
In view of the lack of Community rules on the subject, there Is 
nothing to prevent a company from using a subsidiary to acquire its 
own shares In order to defend Itself against a hostile takeover bid. 
In this way, the restrictions on the acquisition of own shares laid 
down In the Second Directive might be breached. Thus a subsidiary 
could acquire shares even beyond the threshold of 10% of the 
subscribed capital of the parent company and exercise the voting 
rights carried by those shares. 
3 OJ C 240, 26.9.1990, p. 7 
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15. It must therefore be ensured that the restrictions placed on the 
acquisition of own shares apply also to acquisitions made by 
subs id Iarles. 
ii• Commentary 
16. The purpose of Article 1 of this Directive Is to extend the scope of 
Articles 19 to 24 of the Second Directive so as to include the 
acquisition of shares In a parent company by a subsidiary. Hence a 
subsidiary would be able to acquire shares In its parent only under 
the same conditions as the latter. 
Such extension means notably that: 
(a) in calculating the maximum number of shares which may be held 
by a company (10%), shares held by all subsidiaries will be 
added to those held by the parent; 
(b) the voting rights attached to shares In a parent company held 
by its subsidiaries will also be suspended. 
In short, In extending the arrangements provided for in the 
Second Directive, the transaction whereby shares In a parent company 
are acquired by a subsidiary must be viewed In the same way as If it 
were an acquisition of shares by the parent company itself. 
This extension does not affect the legal nature of the above 
provisions. They are minimum provisions which permit Member States 
to impose more severe restrictions on the transactions in question. 
17. For the purposes of this Directive, a company is deemed to be a 
subsidiary of another company If the latter satisfies one of the 
following requirements: 
(a) it holds a majority of the voting rights in the former; or 
(b) it has the right to appoint or remove a majority of the 
directors; or 
(c) the right to control by itself a majority of the voting 
rights pursuant to an agreement or a control clause In the 
subsidiary's statutes. 
These requirements are based on criteria applied by other Community 
legal Instruments, namely Directive 83/349/EEC of 13 June 1983 on 
consolidated accounts4 and Directive 88/627/EEC of 12 December 1988 
on the information to be published when a major holding in a listed 
company is acquired or disposed of.5 
4 0J L 193, 18.7.1983, p. 1. 
5 0J L 348, 17.12.1988, p. 62 
£SS3s83se3^?5*HS9s 
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Proposal for a Council Directive amending 
Directive 77/91/EEC 
on the formation of public limited liability companies 
and the maintenance and alteration of 
their capital 
THE COUNCIL OF THE EUROPEAN COMMUNITIES, 
Having regard to the Treaty establishing the European Economic Community, 
and in particular Article 54 thereof, 
Having regard to the proposal from the Commission, 
In cooperation with the European Parliament, 
Having regard to the opinion of the Economic and Social Committee, 
Whereas in order to maintain the subscribed capital and ensure equal 
treatment of shareholders, Directive 77/91/EEC1 limits the right of a 
company to acquire Its own shares; 
Whereas the restrictions on the acquisition of own shares apply not only 
to acquisitions made by the company Itself but also to those made by a 
person acting in his own name but on the company's behalf; 
Whereas a subsidiary company does not enjoy true independence in 
determining its line of action; whereas in order to prevent a company 
from using a subsidiary to make such acquisitions without regard to the 
restrictions imposed in that respect, the arrangements concerning the 
acquisition by a company of its own shares should be extended to cover 
the acquisition of a company's shares by a subsidiary, 
HAS ADOPTED THIS DIRECTIVE: 
1 OJ L 26, 31.1.1977. 
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Article 1 
The Directive 77/91/CEE of the Council Is amended as following: a new 
article 24b I s Is added after article 24. 
"Article 24t?ls 
1. A subsidiary company may acquire shares In its parent company only 
to the extent that the latter may acquire Its own shares by virtue 
of provisions adopted pursuant to Articles 19 to 24. For the 
purposes of those provisions, acquisitions of shares In the parent 
company by Its subsidiaries shall be deemed to have been made by the 
parent company. 
2. For the purposes of paragraph 1, "subsidiary company" means any 
company in which another company (the parent company) 
(a) holds a majority of shareholders' or members' voting rights; or 
(b) has the right to appoint or remove a majority of the members of the 
administrative, management or supervisory body and is at the same 
time a shareholder in or member of that company; or 
(c) has the right to control alone a majority of shareholders' or 
members' voting rights pursuant to an agreement entered into with 
other shareholders In or members of that company or to a provision 
in Its statutes." 
-J^-^*=S=»^3^-'-~~S 
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Article 2 
1. Member States shall adopt before the laws, regulations and 
administrative provisions necessary to comply with this Directive. 
They shall forthwith Inform the Commission thereof. 
2. The date of entry Into force which Member States lay down for these 
provisions shall be not later than 
3. Member States shall communicate to the Commission the text of the 
main provisions of national law which they adopt In the field 
covered by this Directive. 
4. When Member States adopt the provisions, the latter shall contain a 
reference to this Directive or shall be accompanied by such a 
reference at the time of their official publication. The methods of 
making such a reference shall be laid down by the Member States. 
- 9 -- 9 -
Th'SDIreCtlM '-^asse. to the «ember states. 
Done at 
For the CounclI 
The President 

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