330 10 Exit of Shareholders
they vary class rights;^4 and the reduction of subscribed capital requires compliance
with a creditor protection mechanism.^5
Increasing the amount of distributable assets. The company can increase the
sum that can be distributed to shareholders in many ways. The sale of assets not
only releases capital and increases liquidity but can also, depending on their pre-
vious book valuation and the applicable accounting standards, increase distribut-
able assets (section 10.2.2 below). In addition, the fair value accounting of finan-
cial assests can help to increase the firm’s distributable profits when times are
good (Volume I).
Why make payments? The company can make payments to shareholders for
many reasons. Generally, shareholders want to be remunerated for their invest-
ment in the company’s shares or for their ancillary services (for the function of
shareholders, see Volume I). Payments to shareholders are a way to influence
share price. If the company’s shares are traded on a stock exchange, a low market
valuation combined with the chance to distribute plenty of assets to shareholders
would be an invitation to make a bid for the company’s shares (and make a wind-
fall profit after the merger of the acquisition vehicle and the target company, see
section 10.5).
Depending on the method of making payments to shareholders, it is also a way
to manage the company’s shareholder base. For example, Ferran has listed the
following reasons for companies to use share buy-backs or issue redeemable
shares: to attract external investors; to facilitate exit; to structure a temporary loss
of control; to return value to shareholders; to give information signals; to achieve
a target capital structure; to expand the range of financial options; to buy back re-
deemable shares at a discounted price; to facilitate the organisation of employee
share schemes; to achieve an informal reduction of capital; to defend against a
takeover or deal with dissident shareholders; and to stabilise share price.^6
Choice of method of making payments. The company can return funds to share-
holders in many ways. The company can pay dividends, purchase shares, and re-
duce capital. The choice between the different methods will be affected by a range
of considerations, including the differences in tax treatment of the various options
and the varying opportunities they offer for managing the shareholder base. The
payment of dividends will not change the company’s shareholder base. Reductions
of capital and buy-backs can be used to reduce the number of shares in issue and –
subject to constraints caused by the principle of equivalent treatment of sharehold-
ers – also the company’ shareholder base. Whereas share buy-backs are only pos-
sible where there are willing sellers, the reduction of capital procedure can – again
subject to constraints – be used to pay off shareholders against their wishes.^7
(^4) Articles 31 and 38 of Directive 77/91/EEC (Second Company Law Directive).
(^5) Articles 30 and 32 of Directive 77/91/EEC (Second Company Law Directive).
(^6) Ferran E, Principles of Corporate Finance Law. OUP, Oxford (2008) pp 203–208.
(^7) Ibid, pp 191–192.