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Is it possible for a company to be cost-effective and at the same time to offer a healthy and competitive working environment, in which management and every employee feel that they essentially contribute from their “post” to the final result and consequently to the financial progress of the company and even benefit from it?

For years, employees’ participation in the company’s profits has been recognized as a major contribution to the achievement of the socio-economic goals of entrepreneurship and adaptability of the company, particularly in the context of today’s competitive global developments. From time to time plenty of studies have stressed the fact that employees’ participation in the company’s profits creates incentives, strengthens employees’ commitment and in general increases the profitability of the company.

This article attempts a comparative overview of the possibilities provided by the recent Law 4548/2018 and Law 4072/2012 with regard to employees’ participation in a Société Anonyme (SA) and a Private Company (PC), respectively, and to the incentives provided by the existing legal framework in terms of the alignment of the company’s interests and the interests of its management and personnel. In particular:

I. PART Α’: The legal framework for employees’ participation in a Société Anonyme (S.A. – “AE”)

Due to the corporate structure of a Société Anonyme (S.A. – “AE”), a divergence between the company’s interests and the interests of its executive body, i.e the Board of Directors, or other top executives, has often been observed in practice. One way to combine the interests of these two sides is to directly link the prosperity of the company with some individual benefit for the members of the Board of Directors or the executives, in particular by means of stock option plans addressed to the latter. Stock option plans constitute an institution which aims to create a “community of interests” between the company providing the stocks and its employees, in an effort to motivate prudential management and reward them for their profitability.

In the above context, the current legislation of Société Anonyme (L. 4548/2018) provides for the following possibilities:

  1. grant of a stock option;
  2. stock awards and
  3. grant of warrants.

1. Grant of a stock option

“Stock option” means the right of a person (here the employee) to cause through a unilateral declaration addressed to the other party (here the company or the shareholders) the conclusion of a share sale contract under specific terms and conditions. The exercise of this right obliges either the company to have the agreed shares available or the shareholders to decide on the issuance of new shares by waiving their pre-emptive right or to transfer part of their existing shares. This right may be granted to the personnel a) in the context of individual agreements between the shareholders and the beneficiaries, pursuant to the explicit provision of Art. 44 of L. 4548/2018 or b) in the context of a plan decided and devised by the company (Art. 113 of L. 4548/2018).

  1. a) In the first case (Art. 44 of L. 4548/2018) the agreement refers to the grant of an option to purchase stocks by way of transfer of shares from one or more shareholders to the employees. The parties may freely agree on the terms of the transfer, while the overall provisions for the conclusion of any kind of contracts and in particular the provisions for the share transfer shall apply.
  2. b) The second case refers to a plan (“stock purchase option plan”), as, according to international practice, its implementation is part of a medium- to long-term planning. The relevant legislative provision was provided for in Article 13 par. 13 of L. 2190/1920 and as of 1st January 2019 it is provided for in article 113 of L. 4548/2018.

The grant of stock options strengthens the management’s and employees’ participation in the achievement of the company’s growth and profitability. This is because stock option plans subject part of the remuneration of executives and employees to the degree of achievement of the business goals. The main feature of this incentive, therefore, lies in its ability to depend the future-orientated remuneration (usually timescale of 3-5 years) on the increase of the robustness and the overall value of the company (improvement of financial statements, etc.). Moreover, unlike salaries, stock options often do not entail direct cost for the company.

Specifically, according to article 113 of L. 4548/2018, for the activation of a stock option plan a General Assembly (GA) resolution, with an increased quorum and majority, is required, while the nominal value of the shares distributed through the plan may not exceed in total 1/10 of the paid-up capital at the date of the resolution of the GA. The aforementioned resolution of the GA shall define at least the way of the shares distribution, the maximum number of shares that may be acquired or issued, the selling price or the method of determining it, the conditions for the disposal of the shares and the beneficiaries or their categories, the duration of the plan and any other related term.

In the above context of the stock option plans, special care should be taken with regard to the way in which the beneficiaries are selected, so as not to infringe the principle of equal treatment of the employees. As a result, to the extent that more employees have the same qualifications and provide the same services under the same conditions, in order to serve the same company’s needs, the company is obliged not to unreasonably exclude any of them from participating in the plan.

2. Stock awards

Stock awards” to the employees were initially provided for in presidential decree (p.d.) No 30/1988 and as of 1st January 2019 in Article 114 of L. 4548/2018. In this case, the transfer of shares and the establishment of the shareholder relationship between the employees and the company take place by way of gift, i.e. without consideration, and usually directly, once possible specific terms are met. The above-mentioned provisions applicable to the stock option plan of art. 113 L. 4548/2018 regarding the decision making and the beneficiaries, apply to the free distribution of shares as well. However, especially for the calculation of the nominal value of the shares distributed for free, which must not exceed 1/10 of the paid-up capital, the law provides that the nominal value of the shares that may be distributed on the basis of any pending stock options according to art. 113 N. 4548/2018, shall also be counted.

3. Grant of warrants

Law 4548/2018 introduces a new type of titles, the warrants, which provide their holder with the right, by means of a unilateral declaration to the company, to acquire shares issued by the latter against payment of a certain amount at the time of the exercise of the right, as is the case with the stock option. Stock warrants, however, differ from an option as the former are securities and can be legally traded on a regulated market. On the contrary, the option is of contractual nature.

4. Specifically about the tracking preferred shares 

Preferred shares are a special category of shares, which, unlike ordinary shares, provide their holders with special privileges of financial nature. Therefore, they constitute an explicit exception from the principle of equal treatment of the shareholders and are divided into preferred shares with or without voting right or with a voting right on certain matters that are clearly defined by the provisions of the Articles of Association.

The most common privileges that preferred shares may incorporate are: the privilege of first or any dividend before the common shares, the privilege of cumulative or fixed dividend, of partial participation in the profits, of receipt of certain interest, the privilege of participation in the profits of a certain business activity (“tracking shares”) etc. The latter refers to the participation by priority in the profits of certain business activity, i.e. of a certain independent business unit of a company, as this may be specifically defined in the Articles of Association. In other words, this privilege is linked to the profits of a certain part of the company.

In particular, according to Art. 38 par. 2 of L. 4548/2018: “[…] The granting of further privileges of financial nature, including the receipt of a certain interest or the participation, by priority, in the profits of certain business activity, as specified in the Articles of Association, is not excluded”.

In practice, the aforementioned “preferred shares” to be issued are intended to be purchased by the executives of the business units and the return of these shares will depend on:

  1. a) The financial performance (i.e. on a profit-loss basis) of the business units that they (the executives) manage, and
  2. b) A series of further quality objectives, in order to ensure the long-term growth of the company.

In other words: The higher the growth of a business unit, the higher the return of its manager’s shares!

The conditions for issuing tracking shares are:

  • the existence of more than one independent economic activities, e.g. the unit of landline, mobile and business customers in a telecommunication company or the unit of food products and healthcare-cosmetic products in a food and chemical processing company,
  • the possibility to create an independent accounting in the specific business unit in order to monitor and record separately the financial statements of this unit,
  • the profitability at company level in order to distribute profits from a specific activity.

The content of the privilege can be configured, among others, based on one or more of the following options in combination:

  • Close tracking or loose tracking of the business activity,
  • Parallel participation or exclusion of parallel participation in the overall profits of the company,
  • Cumulative privilege (if no profits are distributed in a financial year due to company losses, despite the fact that the specific activity is profitable, the dividend that would correspond to that year will be paid in the first following year, during which profits can be distributed at company level).

The precise determination of the privilege, as well as the method of calculation and the reference size (business profits), shall be indicated in the Company’s Articles of Association. It is, therefore, possible to include in the Articles of Association the mathematical formula on the basis of which the privilege of the beneficiary employee will be calculated, provided that the method of the calculation follows unequivocally.

II. PART B: The legal framework for employees’ participation in a Private Company (PC – “IKE”)

  1. The reasons why a Private Company (PC – “IKE”) may seek the participation of its employees in the corporate scheme are the same as in a SA. However, in the case of PCs, there is no explicit provision such in Articles 113 and 114 of L. 4548/2018, regarding stock option plans drawn up and implemented by the company’s bodies. Furthermore, according to the provisions of article 87 of L. 4072/2012, a PC, unlike the SA, may not acquire, directly or indirectly, its own shares, which may be then transferred to third parties.

The current legislation of Private Companies provides for the following possibilities:

  1. Grant of an option based on an agreement between shareholders and employees, similar to the option of art. 44 L. 4548/2018. Thus, according to art. 86 of L. 4072/2012: “The shareholders may agree with each other or with third parties to provide an option to purchase or sell shares. This agreement is recorded in the shareholders’ book. If the manager of the company confirms that the option has been exercised, he/she shall enter the change of the beneficiary in the book without delay. “
  2. Acquisition of non-capital contributions by the employees: An alternative possibility for the employees’ participation in a PC is the acquisition of non-capital contributions, which may represent the provision of work, know-how, added value, etc. According to art. 89 of L. 4072/2012, for the entry of a new shareholder through the acquisition of non-capital contributions, a unanimous decision of the shareholders/partners, which must indicate the number of new shares acquired by the new shareholder and the contribution to be acquired, is required. The new shares to be issued in favor of the employees may be defined as restricted (“blocked”) in the sense that they may not be transferred without prior permission of the Partners’ Meeting. In any case, in order for the non-capital shareholder to be able to transfer these shares, he/she will have to redeem his/her liabilities by paying to the company an amount equal to the value of his/her contribution.
  1. Within the context of the operation of a PC, there is no provision for the issuance of tracking shares, equivalent to the above for a SA. However, provisions for preferred shares are permitted as well as for restrictions on the right to receive profits, but for a period which does not exceed 10 years. Therefore, it could be supported that if there is a relevant provision in the Articles of Association and a partners’ resolution regarding such distribution, certain corporate shares may provide a dividend on the profits deriving from certain business activity. The prerequisites for such a provision in the Articles of Association are equivalent to those for a SA.

The content of the privilege, i.e. the method of profit calculation and therefore of the dividend, must be clearly defined in the Articles of Association.

Thus, there could be a provision for:

  • the issuance of preferred shared in favor of the employees, for which the method of calculation of the privilege will limit the reference amount to the profits of a certain activity and at the same time
  • the exclusion of the right of same employees from the remaining profits, with a maximum exclusion period of 10 years.

III. Conclusions

It follows from the above that in the context of a SA and in the light of L. 4548/2018, there is an established legal framework which provides a well-defined road map for the preparation and implementation of stock acquisition plans for executives and employees in general, according to the limitations and conditions set by the relevant legal provisions. This does not mean that the company’s choices are limited, as the law allows the determining body to specify the terms and conditions for the implementation of the relevant plans (e.g. regarding the time and the conditions for granting and exercising, further terms of transfer of stock options etc.) based on the needs and the goals of each company.

On the other hand, within the framework of a PC, there are not such detailed conditions, but the specific terms of employees’ participation in the corporate scheme depend on the agreement between the parties.

In any case, it is a fact that the financial participation of employees in the company can play an important role in stimulating the development of new and dynamic companies, as it promotes the link between the employees and the company by creating a long-lasting bond between them and at the same time provides incentives to the employees to increase their productivity and hence to improve the company’s financial position.