The Share Capital Increase Of A Société Anonyme By Contribution In Kind And The Issuance Of Shares At A Premium

The increase of the share capital of a société anonyme constitutes one of its principal forms of financing. It is distinguished both from financing through external sources, such as borrowing, and from the more flexible financing through hybrid instruments (see here and here). In the present article, we will examine a specific form of capital increase, namely one effected through the payment of contributions in kind, as well as the case of the issuance of shares at a premium, which may arise as a consequence of such increase.

The increase of the share capital of a société anonyme:

The increase of the share capital of a société anonyme takes place, in principle, either through the issuance of new shares or through an increase in the nominal value of the existing shares. In the first case, the share capital increase may be effected either by payment in cash of the value of the new shares upon their subscription or, provided that there is a relevant provision in the resolution of the competent corporate body, by contributions in kind, namely by the transfer of the shareholder’s personal assets to the company. The increase is resolved upon by the General Meeting with increased quorum and majority requirements — an ordinary capital increase — or, as the case may be, by simple quorum and majority. The same power may also be granted by the articles of association to the Board of Directors, in which case increased quorum and majority thresholds are again required — an extraordinary capital increase.

The function of the contribution in kind:

The capital structure of a société anonyme constitutes the foundation upon which its economic activity is built. Frequently, in modern business practice, the need for a share capital increase does not arise from the pursuit of liquidity, but from the strategic decision to incorporate assets through which the company will develop its business activity. In this latter case, the capital contributed to the company does not consist of cash but of assets in kind. Thus, a hotel company may need to acquire a specific immovable property in order to exploit it commercially through the construction of a new hotel unit, thereby expanding its activity without being required to disburse cash resources for its acquisition. At the same time, the contributor also benefits, since they participate in the capital increase by contributing an asset, without it being necessary to raise cash funds for that purpose — funds which may not be available at the relevant time.

The provisions of Law 4548/2018 on sociétés anonymes:

The possibility of paying up the share capital, whether initial capital or capital following an increase, by way of a contribution in kind is expressly permitted by Law 4548/2018, Article 16 paragraph 1. The law contains special provisions which differ from the general rules governing the payment of capital by cash contribution. The basic provisions of the law may be summarised as follows:

• Content of the resolution: The company’s articles of association, in the case of payment of the initial share capital, or the resolution of the corporate body deciding on the capital increase, must specify the type of contribution, the person undertaking the obligation to pay it up, and the amount of capital to which that contribution corresponds pursuant to Article 17 paragraph 1.
• Subject matter of the contribution: Under the law, a contribution in kind consists of assets that are capable of monetary valuation pursuant to Article 17 paragraph 2. Accordingly, the subject matter of a contribution in kind may include, indicatively: (a) a right in rem, for example ownership over movable or immovable property, even if encumbered, such as by a pledge or mortgage, as well as a usufruct right; (b) the granting of the use of an asset or the exploitation of a right; (c) a trademark, a patent, the goodwill of a business, as well as know-how; (d) receivables; (e) corporate participations, and so forth. By contrast, work or the provision of services by the shareholder may not constitute the subject matter of a contribution in kind.
• Valuation: The determination of the value of the asset contributed requires the preparation of a valuation report, which the law assigns to two certified auditors or accountants, or to an audit firm, or, as the case may be, to two independent certified valuers, and which is published with the General Commercial Registry (G.E.MI.) pursuant to Article 17 paragraphs 3 and 8. The main purpose of this procedure is to avoid the risk of overvaluation of the asset, a risk which burdens the company itself, through the increase of its cost of capital due to the need to generate returns on a fictitious capital base, as well as the other shareholders — other than the contributor — through the dilution of the value of their participation, and, in certain cases, third parties as well, such as employees and creditors. Thus, the valuation report reflects the actual value of the asset, ensuring the real substance of the share capital. In this context, the valuation report operates as an upper limit: contributions in kind may not be recorded at an amount higher than that resulting from the report, although they may be set at a lower amount pursuant to Article 17 paragraph 7. In order to safeguard the current and up-to-date character of the valuation, the law further requires that payment of the contribution must not take place more than six months after the date of the valuation report, pursuant to Article 17 paragraph 9.
• Content of the valuation report: In terms of content, the valuation report must include a description of the contribution in kind, a reference to the valuation methods applied, and an opinion on its value, pursuant to Article 17 paragraph 5. The valuation methods are selected by the valuers and vary depending on the type of asset contributed, for example the Discounted Cash Flow method, or DCF, fair value, or comparable transactions.
• Possibility of omitting valuation: Subject to the specific conditions laid down in Article 18, the valuation procedure may be omitted, for example where the asset has already been valued at its fair value by a recognised independent expert within six months prior to the contribution being made, on the basis of generally accepted valuation standards.
• Pre-emption right: In the case of a capital increase by contribution in kind, the pre-emption right of the existing shareholders is not granted directly by operation of law, but requires a relevant provision in the articles of association, pursuant to Article 26 paragraph 1. The rationale is that, in such a case, the company needs to acquire a specific asset which is owned by a particular person and, consequently, can be contributed only by that person and not indiscriminately by the existing shareholders.
• Certification of payment: The certification of payment of the initial share capital, or of any increases thereof, by way of a contribution in kind may be carried out by the company’s Board of Directors itself, irrespective of the company’s size, pursuant to Article 20 paragraph 8. Thus, the certification of payment is facilitated as compared with a cash contribution, which, in the case of a capital increase by medium-sized and large entities, requires a relevant report by a certified auditor-accountant or an audit firm. In the case of a contribution in kind, certification presupposes completion of the transfer procedure, depending on the nature of the contribution. Accordingly, the contribution of ownership over immovable property cannot be certified before the registration of the relevant notarial deed with the Cadastre has been completed.
• Tax considerations: A contribution in kind is subject to ordinary taxation, depending on its nature. Thus, in the case of a contribution of ownership over immovable property, real estate transfer tax will, in principle, arise, amounting to 3% of the taxable value of the property, plus a 3% levy in favour of municipalities and communities calculated on the amount of the main tax, which will be borne by the acquiring company.

The issuance of shares at a premium, particularly in the case of contributions in kind:

Law 4548/2018 permits the issuance of shares at a premium, namely shares with an issue price exceeding their nominal value, pursuant to Article 35 paragraph 3. The issuance of shares at a premium performs a dual economic function, which is critical for maintaining corporate equilibrium. First, it constitutes the consideration paid by the new shareholder for acquiring a participation in the company’s already existing goodwill or surplus value. If the new shares were issued at par, that is, at their nominal value, while the company had already generated surplus value through reserves or reputation, the new shareholders would unjustifiably appropriate part of the value created by the existing shareholders. Second, the issuance of shares at a premium allows the company to raise capital without a corresponding increase in the number of shares or in their nominal value, thereby avoiding disruption of the ownership ratios and voting rights within the company. The issuance of shares at a premium in the context of a share capital increase is conceivable both where the value of the new shares is paid in cash and where it is paid in kind. In other words, the contribution, whether made in cash or in kind, may result in the contribution of assets to the société anonyme which either equals the aggregate nominal value of the new shares or exceeds it; in the latter case, the new shares are lawfully issued at a premium.

Management of the Share Premium Account:

Payments made at a premium constitute an element of the société anonyme’s own funds, or equity, and are not treated as equivalent to share capital. Pursuant to Article 35 paragraph 3 of Law 4548/2018, the share premium account may not be used for the payment of dividends or profit shares. However, two principal ways of utilising it are available:

Capitalisation:
The premium may be capitalised, namely converted into share capital through the issuance of new shares, which are distributed to the shareholders free of charge.

Set-off against losses:
The most critical possibility, introduced by Law 4587/2018, is the direct set-off of the share premium account against accumulated losses for the purpose of extinguishing them. This is permitted only where there are no other reserves or accounting items that may be used to cover the losses, thereby providing an effective mechanism for balance sheet restructuring.

Capital duty:

According to the case law of the Council of State — Judgment No. 1774/2018 — and the relevant circulars of the Independent Authority for Public Revenue, AADE, including POL. 1238/2018, payment of the share premium does not fall within the scope of capital duty, currently 0.2%, at the time of its payment. This is because, at that time, the contributor does not acquire any additional right, such as voting rights, beyond those corresponding to the nominal value of their contribution. For this reason, the tax is imposed only on the amount corresponding to the nominal value of the shares. The tax liability, in respect of the part relating to the share premium, arises only upon any subsequent capitalisation thereof. Likewise, the set-off of the share premium against losses is not subject to capital duty.

Conclusion:

A share capital increase by contribution in kind enables the company to utilise assets without tying up liquidity. Any issuance of shares at a premium in this context safeguards corporate equilibrium and protects the interests of the existing shareholders. The proper structuring of the transaction — with particular emphasis on the valuation report and on the accounting and tax treatment of the share premium — is essential in order to ensure its legal integrity and economic efficiency.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.