CELEX: 51990PC0631
Language: en
Date: 1990-12-13
Title: 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

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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 ---pagebreak---                                              2 -
                                  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.
 ---pagebreak---                                   - 3 -
     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,
 ---pagebreak---                                     - 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
 ---pagebreak---                                                - 5
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, 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
 ---pagebreak---                                      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.
 ---pagebreak---                                          _ 7 -
                                       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
 ---pagebreak---                                 - 8
                              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.
 ---pagebreak---                                               - 9 -
Th
   ' S D I r e C t l M ' - ^ a s s e . to the «e m b e r states.
Done at
                                                                 For the CounclI
                                                                 The President
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                                                              COM(90) 631 final
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