The Corporation as Shareholder and the Market for its Own Securities
THE CORPORATION AS SHAREHOLDER AND THE MARKET FOR ITS OWN SECURITIES, Giappichelli: Turin, 2012
Posted: 21 Mar 2012
Date Written: March 19, 2012
This book discusses the implementation and execution of a company repurchasing its own shares, thus acting as a player in the market of its own securities while becoming a shareholder. The research’s starting point is the blatant contradiction between common business experience, suggesting that buy-back is a widespread and useful corporate practice, and recitals to EU Second Company Law Directive, highlighting that the legislation of the Member States must prohibit or at least restrict the ability of a company to repurchase its own shares, in order to protect other shareholders and creditors from the alleged risks to the subscribed capital, this being the creditors only protection. Recitals to the Italian Civil Code also stress potential risks for minority shareholders; a similar approach is shared by the EU legislation on Market Abuses, which is aimed at avoiding risks of insider trading and market manipulation by the issuer itself. Contradictions are also present within EU law, business practices and Italian law.
EU law requires the Member States to prohibit or at least restrict transactions on a company’s own shares, but it also permits broad exemptions without describing what higher interests should be taken into account when evaluating whether an exemption applies. An amendment to the EU Second Company Law Directive, passed in 2006, expands such exemptions, the result of which encourages companies to repurchase their own shares. On the one hand, EU Member States are now permitted to allow companies to potentially buy-back all of the issued shares — the once existing limit (i.e. companies could not redeem more than 10% of the overall outstanding shares) has now become a constraint to the Member States’ ability to impose quantitative restrictions. On the other hand, restrictions on financial assistance practices, due to the lack of confidence in such practices, have been loosened — provided that requirements for direct buy-backs are met, Member States may allow companies to provide loans or give warranties to attract the investment of third parties in the company’s shares. Contradictions also emerge from business experience. Corporate finance studies explain why corporations are interested in buy-backs. Distribution of excessive liquidity, as an alternative to dividends, is one of the main reasons corporations are interested in buy-backs. Furthermore, listed companies trade their own shares in an attempt to control market prices; in particular, a buy-back plan is generally announced to signalize an undervaluation of the shares. The same economic studies show, however, that market manipulation, either by the company itself or by its insiders or related parties, can cause serious risks to the company.
Lastly, contradictions exist in the Italian Civil Code. On the one hand, pursuant to the Italian Civil Code, the company repurchasing its own shares becomes a shareholder, and treasury shares may be maintained forever, hence affecting the company’s balance of powers. When a company repurchases its own shares, under Italian Law, voting rights are suspended — not elapsed — but all outstanding shares must be taken into account for determining all required quorums and majorities. It is unclear what interests this choice satisfies. On the other hand, close corporations are prohibited from any transaction on their own shares. In light of the new trend in the EU legislation, relaxing restraints on buy-backs, such absolute prohibition makes no clear sense. These and other contradictions addressed in this book, in the regulatory system and in the practical use of buy-backs, either by listed or non-listed companies will have to be resolved either by interpreters, Academia and the Courts, or by the law itself.
The remainder of this book focuses on various aspects of transactions on a company’s own shares, such as subscription, acquisition, trade and financial assistance, proposing solutions deemed to be adequate to the interests a buy-back satisfies. It also discuses the rules that apply when a company holds its own shares in treasury and the consequences of a company failing to meet the requirements for a particular transaction.
Analysis de-emphasizes the increasing, although basically unaware, favor for buy-backs. Buy-backs shall be favored only in case they are proved to be the only (or the best) tool granting a certain legitimate interest.
The final chapter attempts to provide answers to two major issues under Italian law, i.e. as to whether, as proposal for a new law to pass (de lege ferenda), the law shall permit buy-backs for close corporations and everlasting treasury shares in joint stock corporations.
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