Supreme Court Ruling of 27 March 2019: Derivative acquisition of own stakes

The Supreme Court gives a purposive interpretation that relaxes the legal limitation on the derivative acquisition of own stakes by private limited companies.

Article 140 of the Companies' Act ("CA") governs the only four cases in which legislators would allow a private limited company to acquire its own quotas (or quotas or shares of its controlling company). The rule is worded using specific language and including cases that are so clearly regulated that it ends with a stark warning "acquisitions made differently to these cases will be null and void".

This rigorousness has, in many cases, favoured a traditional approach to article 140. For example, in the event that a Commercial Registry records a capital reduction deed in which it was specified that a company's quotas had been acquired before approving the capital reduction, and not the other way round. So, in essence, what was not being met was the case set out in article 140 b), which allows the acquisition in execution of a capital reduction resolution. This case has been analysed nonstop by the General Directorate for Registries and Public Notaries, a body that has been considering, as a legal possibility, the acquisition of quotas prior to their depreciation, as long as the guarantees established for executing a capital reduction are respected (see Resolution of 22 May 2018).

Also, the Supreme Court Ruling no. 190/2019, of 27 March 2019 goes further by validating the acquisition of own quotas not considered in article 140 of the CA.

The transaction being ruled on was carried out through four deeds granted on the same day. Two of these are specially relevant to this article. In the first deed, the shareholders transferred all the shares of the company to a private limited company in exchange for a stake that this company had in another one. Immediately after, the company sold its recently acquired own quotas to a third party. Years later, one of the shareholders legally challenged the transactions, claiming, among other things, that article 40 of the then Private Limited Companies Act (now article 140 of the CA) had been infringed.

The Commercial Court initially considered the claim and cancelled the swap transaction through which the company had acquired its own quotas. However, the Provincial Court and, at a later date, the Supreme Court held a different view. The High Court argued that the swap could not be analysed separately from the other group of transactions and it referred to the aim of the rule to defend the validity of the acquisition on the following terms:

"The rationale of the rule (art. 40.1 LSRL) mainly responds to the safeguard of the effectivity and integrity of the company's equity capital, as a guarantee for the company's creditors, that has not been affected in a case like this one, and in which the acquisition was merely instrumental and the ownership so brief that it only lasted the necessary time to immediately transfer it for the same exchange value.

The protection of the shareholders' financial and non-financial rights, which are also taken into account when analysing the legal regulations for treasury stock, is also not affected by this case, because the contractual network framing the swap, whose cancellation is being requested, responds to the agreement reached by all the shareholders to redistribute the ownership of the stakes in the family's holding companies".

This purposive interpretation draws attention to the possibility of playing with the temporary ownership of own quotas in the reorganization of companies or family assets, which, from a practical standpoint, is an interesting possibility. It can also cause a mechanism that would enable the exit of shareholders, if none of the other participants had enough cash to make an acquisition from the exiting shareholder, but did have assets that could be of interest to the company. Therefore, the company would be able to acquire its own quotas and then swap them for this non-monetary asset.

The interpretation of the Ruling means that the Supreme Court understands that banning article 140 is aimed at protecting two legal interests:

• The company's creditors: by creating a holding of its own shares, the company sees the integrity of its capital effectively reduced, but does not instantly show the amount of the registered capital.
• The shareholders: their concern in preventing changes in any non-financial rights as a result of treasury stock and any fraud related to their preferential acquisition rights when selling to a third party.

Therefore, to ensure that this formula is valid, all shareholders should unanimously agree to the acquisition of own quotas which should then be promptly transferred.