Share Capital Increase of Unlisted Companies

Topics: Bond, Stock, Corporation Pages: 5 (1906 words) Published: April 11, 2011

Limited companies nowadays have undoubtedly established their importance in the development and evolution of the global economy. Their particular legal and actual form, in conjunction with the financial figures they usually represent have turned these specific entities into a springboard of capital growth and expansion. Because of the great importance held by limited companies in the functioning of the national, but also the global economy, the need to offer to each of them the possibility of adjusting its capital arises. Thus, a limited company can meet the special circumstances that occur at any time in the industry and in the place(s) it is active in1. However , in several cases, in order to expand its turnover or upgrade the services provided a limited company is required to increase its share capital so as to meet new needs2. This increase of capital, commensurate with the special characteristics and the way it is implemented, is divided into several classifications. In the context of this piece of work, reference will be made to a relatively unusual way of share capital increase by capitalization of liabilities. This can be considered as an outstanding case of application of creative accounting from a limited company, since we can identify an effort to ‘embellish’ the company’s financial data. In that way the company covers the needs of capital change by utilizing liabilities. This case is a sub case of the so-called real capital growth as the company receives the financial assets necessary for the capital increase from external sources and not through self-financing3. Through the conversion of liabilities into capital the company shall be exempted from its debts and also, given the increase of its capital, be reinforced in the markets. There are three main methods of converting liabilities/debt to capital4. Firstly the conversion of convertible bonds, which the company has already issued in view of a previous bond loan, into shares5 (Article 1 Law 3156/2003). In this case because of the dual nature of bonds, corporate lenders may, in exercising their rights, convert bonds into shares instead of the full payment of the amount corresponding to the bond. That is, it is a ‘facultas alternative’ of the bond lender6. Therefore, in such a case, the contribution is offset against the claim that the creditors themselves have against the company. So, by issuing such a bond loan a limited company essentially increases its share capital on approval7 (Article 8 Law 3156/2003). This is because the bond issue meets all the required conditions of publicity. Only the exercise of the formative right leads to an increase in the share capital, without constitutive importance to the consequent amendment of the Articles of Association8. The said approval is dependent upon the exercise or non exercise of the right to convert bonds into shares by corporate lenders. Indeed, this right of conversion can not be removed / reduced by decision of any company body (Article 1(8) Law 3156/2003). Of course, the use of such a possibility depends on lenders discretion and balancing of whether they benefit more from the conversion and the subsequent acquisition of share capacity or from the immediate full payment of the amount owed to them9. So, in such cases the general economic climate as well as the financial position of the company in conjunction with the prospects of its development plays an important role. All that is required for the bond lenders to become shareholders is to send their unilateral relevant statement to the company on the activation of the conversion. In general, such a statement is made before the limited company’s payment managing bank10. The bond issue is made possible following a decision of the extraordinary general assembly as provided in Article 3a Law 2190/1920. At the same time however this possibility may be granted to the...
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