The temptation of the treasury stock policy. Sanctions regime
Everything begins with the need to overcome an asset imbalance. In most cases, these are situations in which you do not know how to act. And then, a temptation arises: the “treasury stock.”
Thus, treasury stock transactions arise. These are usually a very useful tool for societies immersed in difficult economic situations. However, it may also result in sanctions for the entity, as well as entail responsibility for a company’s managers.
Caution should be exercised before carrying out such a transaction as they can have a very negative effect on the economic and financial development of a society.
The term “Treasury stock” was introduced into Spanish legislation through European Directives. Historically, it has been used when a company acquires its own shares, or when it acquires those issued by its parent company. The latter in the case of an existing group of companies.
Traditionally, there has been distrust of this practice due to the serious consequences that can result. Thus, from a dogmatic perspective, it has been affirmed that societies cannot be partners of themselves.
Arguments against “treasury stock”
As we said earlier, there are arguments against the practice of treasury stock. Among others, we highlight the following:
It is a contradictory situation, since the company lacks the capacity to acquire its shares. In addition, there may be eventual undesirable effects. All this also has to take into account the possible negative impact of the treasury stock in the economic and assets situation of the company.
This goes hand in hand with other negative effects such as emptying the guarantee function of diluted capital and diminishing its solvency. Likewise, the economic capacity may decrease.
Along with what we’ve seen above, there is also the risk that treasury stock will be used in a devious manner. That is, it could be used as a tool to modify the correlation of powers in the corporate-internal sphere.
Thus, it would be implemented through its use by administrators in a discriminatory and arbitrary manner. Therefore, it would entail the removal of the unruly minority and the reinforcement of others.
Additionally, another foundation contrary to treasury stock is the inadequate publicity of their own resources contributed by the partners.
Finally, it is alleged that this practice can affect the value of a society in the market, especially in the case of companies with dispersed capital. This follows from the Supreme Court Judgment no. 79/2012 of March 1, 2012.
Treasury stock in the Capital Companies Act
Despite the above arguments, the Capital Companies Law (hereinafter “CCL”), allows treasury stock. Of course, certain conditions must be met and they must be within certain legal limits.
A company cannot subscribe to its own shares or those issued by its parent company. Therefore, the original acquisition by the limited liability company (hereinafter “LLC”) is null and void (Article 136 CCL).
With regard to an operation carried out by a public limited company (hereinafter “PLC”), the situation is different. In this case, the law states that the subscribed shares will be the property of the PLC subscriber. Consequently, the sole obligation to pay rests with the founding partners or promoters. And, in the case of capital increase, on the administrators.
In addition, the following should be considered when dealing with the subscription of shares of the parent company. And in considering this, the obligation to disburse will fall jointly and severally against the directors of the acquiring company and the parent company.
The shares acquired by a PLC must be sold within a maximum period of one year from the first acquisition. Compliance with this obligation is especially relevant.
Therefore, the company must reduce its capital in the two months following the date of the end of the term for the sale. Otherwise, any interested party may apply to the commercial judge in the place of the registered office.
Derivative acquisition made by an LLC
The Law admits the derivative acquisition of the own shares or of the shares issued by the parent company. However, they still have to follow certain conditions.
- When they are part of a heritage acquired on a universal basis, or are acquired gratuitously. Or as a result of a judicial award to satisfy a credit of the company against the owner thereof.
- When their own shares are acquired in execution of a capital reduction agreement adopted by a general meeting.
- When their own shares are acquired in the case of forced transfer.
- When the acquisition has been authorized by a general meeting, and has also been made with a charge to benefits or freely available reserves. Likewise, there are considerations:
- Shares of a partner that are separated or excluded from the company.
- Shares that are acquired as a result of the application of a restrictive clause of the transmission thereof.
- And shares transmitted mortis causa.
While the shares acquired in treasury stock remain in the possession of the acquiring company, all rights corresponding to them will be suspended.
In addition, it will be mandatory to establish a reserve equivalent to the amount of such shares. And this must be maintained as long as the holding party is not incapacitated.
Finally, it is important to note that their own shares must be amortized or disposed of within three years. This is not the case with the shares of the parent company. These must be disposed of within one year from the date of acquisition.
Derivative acquisition made by a PLC
The PLC may freely acquire its own shares of its parent company. This is established in the Law, as long as:
- Their shares are acquired in execution of a capital reduction agreement. This agreement has to be adopted by a general meeting of the company.
- The shares are part of an equity acquired on a universal basis.
- Shares that are fully released are acquired for free.
- Units or fully paid shares are acquired as a result of a judicial award. And have as purpose to satisfy a credit of the society in front of its holder.
Regarding the above, we indicate the following. The shares acquired in accordance with points 2) and 3) must be disposed of within a maximum period of three years. The term to be counted is from the date of acquisition, unless they had previously been amortized by reducing the share capital or when the shares do not exceed twenty percent of the capital stock.
For the calculation of this percentage, they must be added to those shares already owned by the acquiring company. Those, if any, of its subsidiaries, should also be considered. That is, those held by both the parent company and its subsidiaries.
Conditions of acquisition by the PLC
The PLC can also acquire its own shares when the following conditions apply:
- That the acquisition has been authorized by agreement of a general meeting. If they are shares of the parent company, the authorization must come from several areas. Consequently, both the general meeting of the acquiring subsidiary and the parent company must authorize it. How? Well, through an agreement that contains the mentions required by law. That is, the modalities of the acquisition, the maximum number of shares to be acquired and the minimum and maximum counter value. In addition, if the acquisition is onerous, the duration of the authorization may not exceed five years.
- That the nominal value of the shares acquired does not exceed 20 percent of the share capital. Or 10 percent when the shares are admitted to trading. For the calculation, it will be necessary to add those already owned by the acquiring company and its subsidiaries.
- That the acquisition does not produce the effect that the net worth is less than the amount of the share capital plus the reserves that are legally or statutorily unavailable.
- That the acquired shares are fully paid for, otherwise the acquisition will be null and void.
The rights, political and economic, incorporated in the shares acquired in treasury stock are suspended. In addition, it will be mandatory to establish a reserve equivalent to the same amount. And it must be maintained as long as the holding parties are not incapacitated.
As for the sale term, they must be sold within a maximum period of one year from the first acquisition.
Finally, we explain the sanctioning regime. The infringement of the provisions of the LSC regarding treasury stock may entail the responsibility of the company’s directors. Thus, they could be subjected to fines for an amount up to the nominal value of the shares assumed. Or of the shares subscribed or acquired, or those not sold or amortized.
The breach of duty to transfer or amortize shall be considered as an independent infraction.
Consequently, the administrators of the offending company will be considered responsible for the infraction and, where appropriate, of the dominant society, as they will be considered to be administrators as well as managers, or people with the power of representation.