5.6 Legal Aspects of Equity Provided by Shareholders 179- Depending on the governing law, the articles of association may provide that
the company has, in addition to a fixed capital, reserves that may not freely be
distributed to shareholders. The company can also have reserves that are not
subject to such restrictions under its articles of association. The use of the latter
will make decision-making easier (but give shareholders more power to require
distributions). - When the company issues shares, it can issue them at a premium and ensure
that the use and distribution of the premium will not be covered by such restric-
tions. - Pre-emptive rights belong to the most fundamental rights of shareholders under
continental European company laws, and the Second Directive provides for the
pre-emptive rights of existing shareholders.^189 Depending on the governing law,
the board may nevertheless have discretion to issue shares or rights to shares. In
principle, the Second Directive does not require pre-emptive rights for all sha-
reholders. First, the Directive applies only to public limited-liability compa-
nies.^190 Second, the Directive provides for pre-emptive rights “whenever the
capital is increased by consideration in cash”.^191 The laws of a Member State
will therefore not need to apply those rights: when capital is not increased at
all;^192 when capital is increased by consideration other than cash (such as shares
in another company); or when the company decides to issue share option rights,
convertible loans, or warrants (capital will necessarily have to be increased on-
ly when those rights are exercised). Third, the laws of a Member State need not
apply pre-emptive rights to shares which carry a limited right to participate in
distributions and/or in the company's assets in the event of liquidation.^193 - The company may have different classes of shares depending on the governing
law. For example, the statutes of the company may provide that the company
may issue redeemable shares (section 10.2.5). The existence of redeemable sha-
res will make it easier for the board to decide on the reduction of the number of
shares and the reduction of capital.
Second, the discretion of the statutory board will depend on the distribution of
power in the company. Even where decisions on shares will have to be taken by
the general meeting under mandatory provisions of company law (see above), the
general meeting may empower the board to take the decisions subject to certain
conditions. For example, the boards of listed companies have usually been author-
(^189) Article 29(1) of Directive 77/91/EEC (Second Company Law Directive).
(^190) For example, the new Finnish Company Act of 2006 made pre-emptive rights optional
for private limited-liability companies
(^191) Article 29(1) of Directive 77/91/EEC (Second Company Law Directive).
(^192) This would require, as in Finnish company law, the separation of shares and company
capital. Under Finnish company law, a “share” does not represent any right to a share of
the company’s “share capital”.
(^193) Article 29(2)(b) of Directive 77/91/EEC (Second Company Law Directive). Distribution
includes in particular the payment of dividends and of interest relating to shares.