In a recent decision, the Austrian Supreme Court considered the validity of the payment of a cash consideration to a public limited-liability company in the course of an increase of its stated capital (decision dated 25 March 2014, file no. 9 Ob 68/13k). As a consequence of the current Austrian jurisprudence on this matter, any and all business transactions that occur in a substantive and temporal connection with a formal increase of the stated capital - including debt-equity swaps – must be made under the disclosure and examination rules for contributions in kind.
In 1999, two Italian individuals subscribed to the cash capital increase of an Austrian public limited-liability company, paying a cash consideration of approx. EUR 12 million. The company forwarded this amount to its subsidiary in Italy, which in turn bought assets from the two Italian individuals for a consideration of approx. EUR 40 million, partly using the money from the capital increase to do so. Four years later, in the course of a dispute with these shareholders, the company "discovered" that it might still have an open claim against these shareholders because the disclosure and examination rules on contributions in kind had not been met and declared that it was offsetting its claim against a damage claim made by the shareholders.
The Supreme Court held that the shareholders' payment in 1999 was void and did not fulfill their payment obligation because the disclosure and examination rules for contributions other than cash contributions were not met. In addition, the court indicated that the parallel business transaction – i.e. the sale of assets from the target company's subsidiary to the shareholders – might be void.
Since an Austrian Supreme Court decision dating back to 2000 (decision dated August 30, 2000, file no. 6 Ob 1232/00f), increases of the stated share capital of Austrian private limited liability companies must be made in accordance with the disclosure and examination rules for contributions in kind if the target company uses the shareholder's cash contribution to buy assets from the shareholder. The new decision extends those rules also to public-limited liability companies (including the Austrian Societas Europaea - SE) and to intra-group transactions in which assets are acquired from the shareholder not by the company whose stated capital is increased, but rather by a 100% subsidiary.
Abiding solely to the rules for cash contributions is therefore dangerous, because although the shareholder paid in cash, the payment is simply disregarded from a legal point of view, thus leading to the result that the shareholder must pay a second time. However, many questions remain open. The most important ones are:
- Is the parallel business transaction valid?
- What is the link between the cash capital increase and the parallel business transaction that qualifies them as a "hidden contribution in kind" (verdeckte Sacheinlage) –"intent" on the part of the parties or merely a "substantive and temporal connection"?
- How long can such a "temporal connection" last? -- e.g. are business transactions between a shareholder and a company that occurred one, two or even more years before or after a capital increase also affected?
- If the parties of the parallel business transaction are natural persons or legal entities other than the company and the shareholder themselves, under what circumstances are they obliged to comply with the disclosure and examination rules for in kind contributions? The Supreme Court has so far decided only on a subsidiary, which is the most obvious relationship including a third party, but there are myriads of intra-group and other relations that could trigger such compliance obligation.
- What is the relation between the rules on "hidden contributions in kind" and the rules implemented in local law on the basis of Art 13(1) of Directive 2012/30/EC (formerly Art 11 of Directive 77/91/EC), which partly cover the same issue?
- And, above all, are these rules on "hidden contributions in kind" or "disguised contributions in kind" in line with the Council Directive 2012/30/EC? The latest relevant official document on this last question is over two decades old: Advocate General Tesauro's 1992 opinion in the case C-83/91 – Meilicke/ADV-Orga. The ECJ did not decide on the merits of this case, but Advocate General Tesauro had proposed that the EJC answers as follows: Art 11(1) in conjunction with Artt 10 and 27(2) of Directive 77/91/EC (recast as Directive 2012/30/EU and there Art 13(1) in conjunction with Art 10 and 31) must be interpreted as meaning that it may not be applied by analogy to cases other than those envisaged therein; such cases remain subject, if appropriate, following an interpretation by the ECJ, to the general rules against circumvention of the law and the like. In particular, a debt-equity swap (i.e. a claim made against and contributed to the company on the occasion of an increase in capital in cash) is to be classed, within the meaning of the Directive, as a contribution in cash in so far as the claim in question is for cash and is liquidated and payable.
Austrian case law seems to be repeating the development of the legal concept of "hidden contributions in kind" in Germany. German law, however, solved the numerous problems arising from this legal minefield in 2008 and 2009 by implementing explicit rules to the company laws for both private limited-liability companies and public limited-liability companies, with the result that business transactions that qualify as "hidden contributions in kind" are in any case valid and the shareholder is only liable if and insofar as the parallel business transaction led to the result that the value that the company received was below the amount the shareholder was obliged to pay. In addition, German law excludes from such liability debt-equity swaps effected in the course of insolvency proceedings.
Although suggested by several legal scholars, Austria has not yet changed its laws. Shareholders of Austrian public and private limited-liability companies, including the SE, must therefore be aware that the rules on "hidden contributions in kind" are still as strict and as disastrous as they had been in Germany before 2008. Any and all business transactions that occur in a substantive and temporal connection with a formal increase of the stated capital - including debt-equity swaps – must therefore be made under the disclosure and examination rules for contributions in kind.