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
Date: 1990-12-13
Institutions: European Commission
Subjects: company law, financial legislation, public limited company, share, share capital

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) 

m 

"** 

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i •  Genera 1 _jccna..l dor at lona 

EXPLANATORY  MEMORANDUM 

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. 

2. 

3. 

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. 

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. 

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 
the 
competition.  In 
opportunities  for  acquiring  companies  must  be  broadly  similar  from 
one Member  State to another. 

international 

context, 

this 

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, 

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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 
b i d. 

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) 
(b) 

it holds a majority of  the voting  rights  in the former; or 
it  has  the  right  to  appoint  or  remove  a  majority  of  the 
directors; or 
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. 

(c) 

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,  1 8 . 7 . 1 9 8 3,  p.  1. 
5  0J  L  348,  1 7 . 1 2 . 1 9 8 8,  p.  62 

£SS3s83se3^?5*HS9s 

6  -

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. 

2. 

3. 

4. 

Member  States  shall  adopt  before 
the  laws,  regulations  and 
administrative  provisions  necessary  to  comply  with  this  Directive. 
They  shall  forthwith  Inform  the Commission  thereof. 

The  date  of  entry  Into  force  which  Member  States  lay  down  for  these 
provisions  shall  be  not  later  than 

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. 

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. 

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T h'S D I r e C t lM  ' - ^ a s s e. to the «em b er  s t a t e s. 
Done at 

For the CounclI 

The President 

ISSN 0254-1475 

COM(90) 631 final 

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