Law for Directors & Managers

Lecture 5

Capital Capital Maintenance & Pledge of shares

Part 2

Dividends – capital maintenance doctrine

_ Restrictions are imposed on the power of the company to make distributions to its members in order to avoid prejudice to creditors

_ Expectations of members vs. the success of the company – a balance must be struck

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Dividends

_ A dividend is a distribution to shareholders out of the company’s profits available for distribution.

_ The profits of the company divided amongst the shareholders in the proportion determined by the articles and, if the articles contain no provision in that regard, in proportion to their shares

_ A dividend is payable in cash or in kind.

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Dividends Profits available for distribution

- Profits available for distribution are defined as the company’s accumulated, realized profits, so far as not previously utilized by distribution or capitalization, less its accumulated, realized losses.

- Calculated by reference to its most recent annual accounts which have been audited and laid before the company in general meeting

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Dividends Profits available for distribution

Public companies (additional restriction)

- It must not make a distribution if, after the distribution, the amount of its net assets becomes less than its called-up issued share capital plus its undistributable reserves

_ Net assets: means the aggregate of the company’s assets less the aggregate of its liabilities.

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Dividends Breach

_ Should a company make a distribution in excess of that allowed by law, the dividend is deemed unlawful.

_ Where an unlawful distribution is made by a company to one of its

shareholders and at the time of distribution that member knows or has reasonable grounds for believing that it is so made, he shall be liable to repay it, or that part of it, as the case may be, to the company or, in the case of a distribution made otherwise than in cash, to pay the company a sum equal to the value of the distribution, or of the part of the distribution, at that time.

_ Should the company’s auditors have advised on an unlawful dividend policy they may be liable for professional negligence.

_ Directors’ liability.

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Dividends Process for distribution

_ The M&As need not specifically provide for the power of the company to declare dividends but may contain provisions specifying when dividends are to be declared and,or restrictions

_ Shareholders cannot insist on the declaration of a dividend

_ Typically, the M&As provide that the company in the general meeting may declare dividends, but no dividend shall exceed the amount recommended by the directors

_ Directors may also be given the power to declare dividends without the approval of the dividend at general meetings

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Dividends Process for distribution

_ Annual dividends vs. interim dividends

_ The directors may set aside out of the profits sums as they think proper as a reserve or reserves. They may also carry forward profits

_ Deductions from the dividend payable may be made by directors on account of calls

_ Payment is made to the members registered in the register of members of the company/ usufructuraries

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Undertaking not to subscribe for or acquire

shares in its parent company

Article 110 (1)(a)

_ It shall not be lawful for an undertaking to subscribe for, hold,

acquire or otherwise deal in shares in a company which is its

parent company.

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Financial Assistance Article 110 (1)(b)

_ It shall not be lawful to give, whether directly or indirectly, and whether by means of a loan, guarantee, the provision of security or otherwise, any financial assistance for the purpose of an acquisition or subscription made or to be made by any person of or for any shares in the company or its parent company.

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Financial Assistance Meaning of the term “financial assistance”

_ No exhaustive list of “financial assistance” provided in the CA.

_ Loaning money, acting as a guarantor, the provision of security

_ There need not be an actual reduction in the company’s assets for financial assistance to take place i.e. it need not take place through a cash payment, the enforcement of security or the calling of a default under a loan – an undertaking is sufficient

_ Must be “financial”

_ Purpose: must be given for the acquisition of shares in the company or its parent (upstream)

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Financial Assistance Consequences of breach and exemptions

_ Without effect and unenforceable

_ Exemptions:

_ 1. If it is for the benefit of genuine employees;

_ 2. Assistance is granted by an investment company with fixed share capital for the acquisition of its fully paid up shares by another undertaking;

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Financial Assistance Whitewash procedure

_ Assistance is granted by a private company which fulfills the following conditions:

_ 1. the Board of Directors has, after taking into account the financial position of the company and the obligations of the general duties of the directors, resolved by the affirmative vote of a majority of all the directors forming the Board at the time of the particular resolution, to authorize the grant of financial assistance for a specific transaction;

_ 2. An extraordinary resolution has been passed affirming the resolution taken;

and

_ 3. A declaration is duly filed in the prescribed form signed by two directors confirming that the requirements set out have been satisfied with the Registrar prior to the granting of the financial assistance, and the signature of one director shall suffice where the Board is composed of only one director (statutory form).

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PLEDGE OF SHARES Article 122

_ Contract creating a security for an obligation given by the debtor of a third party for the debtor (e.g. a guarantor)

_ Pledge on shares is regulated by the Companies and, in some instances, the Financial Collateral Arrangements Regulations (S.L. 459.01)

_ Confers upon the creditors a privilege to obtain payment out of the pledged shares (ranks higher than other security)

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PLEDGE OF SHARES Constitution

_ Must be constituted by a contract (private writing or a public deed) entered into between the pledgor and the pledgee.

_ In the case of a private company, securities may not be pledged unless the memorandum or articles of the company specifically so provide. Shares in a public company, on the other hand, may generally be pledged unless otherwise provided for in the memorandum and articles of the company.

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PLEDGE OF SHARES Perfection

_ The pledge must be notified to the company and the Registrar within 14 days of the granting of the pledge (known as the Form T2). It is effective against third parties when the Form T2 is registered with the Registry of Companies

_ The Form T2 may be signed by either the pledgor or the pledgee

_ The company whose shares have been pledged must record the pledge in the register of members.

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PLEDGE OF SHARES Effect of the pledge

_ Any transfer or assignment of pledged shares whether by onerous or gratuitous title is null and void if it is carried out without the consent of the pledgee

_ Where, however transfer or assignment is made with the consent of the pledgee the shares shall continue to be subject to the pledge

_ No further pledges may be constituted – a second ranking pledge is not permissible

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PLEDGE OF SHARES Enforcement

_ In the event of default under the pledge agreement, the pledgee may apply for the judicial sale of the shares or, after giving notice by judicial act to the pledgor and the company:

1. dispose of the shares pledged in his favour; or

2. appropriate and acquire those shares himself, in settlement of the debt due to him or part thereof.

_ The pledgee is entitled to exercise that right notwithstanding anything contained in the memorandum of association of the company or the Civil Code.

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PLEDGE OF SHARES Value of the pledged shares

_ For the purpose of determining the value at which the pledged shares should be disposed of/appropriated by the pledgee, the value of the pledged shares may be established by agreement between the parties after notice of default has been given by the pledgee to the pledgor and no prior agreement thereon is valid. Provided that in case of disagreement, the value is established by an accountant appointed by the Court upon the pledgee’s request. The fair value of the securities will be that obtaining on the date of the notice of default sent by the pledgee to the pledgor.

_ The pledgee cannot dispose of the shares at less than their fair value (determined at the date of the notice of default). In the case of disagreement, the pledgee may apply to the court to have the shares sold at less than their fair value

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PLEDGE OF SHARES Pre-emption rights

_ Private company: pre-emption rights (either in terms of the M&As or if they are silent, in proportion to members’ holdings)

_ Public company: pre-emption rights apply only if they figure in the M&As

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PLEDGE OF SHARES Terms of the pledge agreement

_ The pledge agreement may specify who is to exercise all the rights belonging to the shareholder during the duration of the pledge, including voting rights and dividend payments.

_ If the agreement is silent:

1. All rights of the holder of shares will be exercised by the pledgor until such time as he defaults under the agreement of pledge or until the pledgee enforces his security;

2. Unless the pledgor and the pledgee have otherwise agreed in the pledge agreement and notice thereof has been given to the company, dividends or interests payments due on securities which are pledged shall, during such time as the pledge is registered in the register of holders of the respective securities, be paid by the company to the pledgee who shall appropriate any such amounts received to the interest due on the debt secured by the pledge, and, if there is an excess, to the capital.

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PLEDGE OF SHARES Terms of the pledge agreement

_ Deliverables under a pledge agreement:

1. undated share transfer instruments;

2. undated director resignations;

3. annotated share transfer instruments;

4. notice upon an issue of shares

5. undertaking that any further shares so issued will be pledged and annotated share certificates and undated share transfer instruments would be delivered to the pledgee.

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PLEDGE OF SHARES Termination of a pledge

_ Notice of termination should be delivered by the pledgee to the Registrar within 14 days from the termination (Form T3). The company and the regulated market, if applicable, should also be so notified of termination.

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PLEDGE OF SHARES Shares quoted on a stock exchange

- The majority of the provisions of Article 122 are inapplicable or modified

1. Notification to the recognised investment exchange - Certified true copy of the pledge agreement must be notified to the

exchange within 14 days + notice to the company 2. Transfer of shares throughout the pledge Any transfer of shares is null and void (notwithstanding consent of the pledgee!) 3. Enforcement of pledge In the event of a default under the agreement of pledge and upon giving notice by judicial act to the pledgor, the Maltese regulated market and the company, the pledgor must have the securities sold through a person duly licensed under the Investment Services Act

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PLEDGE OF SHARES Financial Collateral Regulations

_ Apply to collateral arrangement constituted over cash, instruments and credit claims;

_ Apply to certain entities (credit institutions, insurance undertakings, investment services providers, financial institutions and non-natural persons in certain circumstances)

_ Abolishes many formal requirements, improves enforcement rules, in or outside insolvency

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PLEDGE OF SHARES Financial Collateral Regulations

_ Noteworthy provisions:

1. A financial collateral arrangement is valid in accordance with its terms;

2. Pre-emption rights in the Companies Act do not apply;

3. Enforcement is made without formal requirements

4. Enforcement takes place notwithstanding insolvency

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PLEDGE OF SHARES Financial Collateral Regulations - enforcement _ On the occurrence of a specified event, the collateral taker may realise any financial

collateral provided under, and subject to the terms agreed in, a security financial collateral arrangement by sale or appropriation and by setting off the instruments’ value against, or applying their value, in discharge of , the relevant financial obligations. Appropriation shall only be possible if in the security financial collateral arrangement the parties have specifically agreed that appropriation may take effect and have agreed, in writing, on the manner of or mechanism for the valuation of the instruments.

_ Unless the parties to a security financial collateral arrangement otherwise agree, the manner of realising the financial collateral does not require that:

_ (a) prior notice of the intention to realise be given; _ (b) the terms of the realisation be approved by any court, public officer or other

person; _ (c) the realisation be conducted by sale by auction or in any other prescribed

manner; or _ (d) any additional time period must have elapsed.

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PLEDGE OF SHARES Financial Collateral Regulations - enforcement _ A financial collateral arrangement shall be valid and enforceable in

accordance with its terms notwithstanding the commencement or continuation of winding-up proceedings or reorganisation measures in respect of the collateral provider or collateral taker.

_ Such a financial collateral arrangement and the provision of financial collateral under such arrangement, shall not be declared invalid or void or be reversed on the sole basis that the financial collateral arrangement has come into existence, or the financial collateral has been provided:

_ (a) on the day of the commencement of winding-up proceedings or reorganisation measures, but prior to the order making that commencement; or

_ (b) in a prescribed period prior to, and defined by reference to, the commencement of such proceedings or measures or by reference to the making of any order or the taking of any other action or occurrence of any other event in the course of such proceedings or measures.

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PLEDGE OF SHARES Financial Collateral Regulations - enforcement

_ If the financial collateral arrangement came into force on the day but after the existence of the winding-up proceedings, the burden of proof is on the collateral taker that he was not nor ought to have been aware of the commencement of such proceedings.

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