Capital Maintenance and Distributions out of Capital in a Comparative Overview: What and Whose Interests Does the Existing EU Law Protect?
Rivista di Diritto Civile, Part II, pp. 559-615, 2010
59 Pages Posted: 4 Feb 2010 Last revised: 30 Jan 2011
Date Written: February 3, 2010
EU Rules concerning capital maintenance and distributions out of capital variously affect shareholders’ and creditors’ interests. It is all but clear, however, what interests do these rules protect. Some hold that the law grants for the interest of both the shareholders and the creditors that existing assets correspond to the capital amount. Others hold that capital maintenance rules facilitate corporate disclosure for the interest of creditors. Others are of the opinion that both capital maintenance and distribution rules play a role in the ability of a distressed corporation either to retain future profits, or not to charge the creditors with the burden of realized losses. None of these arguments is convincing.
Rather, wide historical and comparative overview shows a very significant trade-off between the American and the rest of the world’s approach, including EU and Italy; this finding helps understand the existing rules and what and whose interest the law protects. EU rules concerning capital maintenance and distributions out of capital highlight the importance of the shareholders’ meeting’s involvement in some of the most crucial decisions for the business activity; in turn, the board of director is clearly entrusted with these choices under American law. In particular, capital maintenance rules limit the room of maneuver of the board when the business faces a crisis; indeed, these rules require that the meeting decide if and what measures are to be undertaken to deal with the situation. Some State rules requiring the meeting’s involvement (i.e. German or English) do not lead to dissolution of the corporation, unless so decides the meeting. Other State rules (i.e. French, Spanish or Swedish) do lead to dissolution, unless the meeting expresses its intention to go on with the business activity. Some legislations, as for example Italy’s, are most unclear, as they require the meeting to mandatorily reduce the stated capital in case of severe losses. This article argues that Italian capital maintenance rules do not force to “recapitalization or liquidation”, as some hold, but only require the shareholders’ meeting’s involvement when a crisis surfaces, as in Germany or England. Further, this Article makes clear that only shareholders’, not creditors’ interests are protected by capital maintenance rules. As a consequence, only shareholders may complain incomplete or missing information from the board concerning the crisis and its reasons. Creditors do take advantage of other means to protect their interests.
The rules requiring a shareholders’ meeting’s involvement when making a distribution out of capital highlight the importance of such a choice under EU law. Also in this circumstance, the law requires a shift of decision seat - in contrast to US law - aiming to provide minorities with all information and procedural tools as to react to the majority’s or the directors’ choice. Although EU law permits the creditors to withstand the decision of making a distribution out of capital, they may not challenge the reasons for the choice of reducing the stated capital. This article states, that they may only halt its implementation, if this would make the corporation insolvent (as under US law) or harm its ability to pay on due course. This finding clearly shows the difference between the EU and the US approach, and consequently explains why it is not appropriate to just “transplant” US rules in the a EU legal environment, or vice versa.
The results of the inquiry help ultimately solve one major issue under EU, and in particular under Italian law. Suppose a corporation (thus, its meeting) reduces the stated capital by means of an exaggerated estimate of losses. Creditors run the risk that still existing, but hidden corporate assets outflow for the benefit of the shareholders. Case law holds that in these cases the meeting’s resolution is void, and all interested parties may seek for relief. This solution, however, overprotects creditors. This article objects that - as US law states - creditors may complain that a distribution makes the corporation insolvent; if a distribution does not make the corporation insolvent or harms its ability to pay on due course, creditors shall not interfere with the business activity. Hence, they have no interest in requiring that the meeting’s resolution is void. Rather, they have an interest that the corporation does not make an undisclosed distribution. As German, English or Spanish law and case law suggest, creditors must be granted the power to compel full disclosure. They have two means: either they complain that the balance sheet does not make a fair and clear view, and compel its amendment; or they object that the way losses are calculated is not correct. Both solutions are effective.
Note: downloadable document is in Italian.
Note: Downloadable document is in Italian.
Keywords: Corporations, Capital Maintenance, Distributions out of capital, Capital reduction, Severe losses, Creditors' Protection, Shareholders Meeting
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