The Supreme Court recently considered the validity of the payment of a cash consideration to a public limited liability company in the course of an increase in its stated capital.(1)
In 1999 two Italian individuals subscribed to the cash capital increase of an Austrian public limited liability company, paying cash consideration of approximately €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 approximately €40 million, partly using the money from the capital increase to do so. Four years later, during a dispute with these shareholders, the company 'discovered' that it might still have an open claim against them because the disclosure and examination rules on contributions in kind had not been met; thus, it declared that it was offsetting its claim against a damages claim made by the shareholders.
The Supreme Court held that the shareholders' payment in 1999 was void and did not fulfil their payment obligation, because the disclosure and examination rules for contributions other than cash contributions had not been met. In addition, the court indicated that the parallel business transaction (ie, the sale of assets from the target company's subsidiary to the shareholders) might be void.
Since a Supreme Court decision in 2000,(2) increases in 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 uses the shareholder's cash contribution to buy assets from the shareholder. The new decision extends this rule 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 subsidiary.
Therefore, abiding solely by the rules on cash contributions is dangerous, because although a shareholder may have paid in cash, the payment is simply disregarded from a legal viewpoint; thus, the shareholder must pay a second time. However, many questions remain, including the following:
- Is the parallel business transaction valid?
- What is the link between a cash capital increase and a parallel business transaction that qualifies it as a 'hidden contribution in kind' – is it 'intent' on the part of the parties or merely a 'substantive and temporal connection'?
- How long can such a 'temporal connection' last (eg, are business transactions between a shareholder and a company that occurred before or after a capital increase also affected)?
- If the parties to 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 contributions in kind? The Supreme Court has so far decided only on a wholly owned subsidiary, which is the most obvious relationship including a third party; but a myriad of intra-group and relationships 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 Article 13(1) of Directive 2012/30/EC (formerly Article 11 of Directive 77/91/EC), which partly covers the same issue?
- Above all, are the rules on 'hidden contributions in kind' or 'disguised contributions in kind' in line with EU Directive 2012/30/EC? The latest relevant official document (Advocate General Tesauro's 1992 opinion)(3) on this question is over two decades old. The European Court of Justice (ECJ) did not decide on the merits of this case, but Advocate General Tesauro proposed that the ECJ answer as follows:
- Article 11(1) in conjunction with Articles 10 and 27(2) of Directive 77/91/EC(4) 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 and following an interpretation by the ECJ – to the general rules against circumvention of the law and the like.
- In particular, a debt-for-equity swap (ie, a claim made against, and contributed to, the company during an increase in capital in cash) is to be classed – within the meaning of the directive – as a contribution in cash, insofar as the claim is for cash and is liquidated and payable.
Similar to German law, Austrian case law is also developing the legal concept of 'hidden contributions in kind'. German law, however, resolved the numerous problems arising from this legal minefield in 2008 and 2009 by implementing explicit rules to 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 always valid, and the shareholder is liable only if the parallel business transaction results in the company receiving less than the amount that shareholder was obliged to pay. In addition, German law excludes from such liability debt-for-equity swaps effected in the course of insolvency proceedings.
Although suggested by several legal scholars, Austria has not yet changed its laws. Shareholders in Austrian public and private limited liability companies, including SEs, must therefore be aware that the rules on hidden contributions in kind are still as strict and as potentially disastrous as they were in Germany before 2008. Business transactions that have a substantive and temporal connection with a formal increase in the stated capital – including debt-for-equity swaps – must therefore be made under the disclosure and examination rules for contributions in kind.
For further information on this topic please contact Peter Konwitschka at Schoenherr by telephone (+43 1 53 43 70), fax (+43 1 53 43 76100) or email (firstname.lastname@example.org).The Schoenherr website can be accessed at www.schoenherr.eu.