332 10 Exit of Shareholders
dividends and of interest relating to shares.^12 There are similar constraints on the
payment of interim dividends.^13
The Second Directive provides that “no distribution to shareholders may be
made when on the closing date of the last financial year the net assets as set out in
the company’s annual accounts are, or following such a distribution would be-
come, lower than the amount of the subscribed capital plus those reserves which
may not be distributed under the law or the statutes”, unless the subscribed capital
is reduced.^14 Furthermore, the amount of a distribution to shareholders may not
exceed the amount of the profits at the end of the last financial year plus any prof-
its brought forward and sums drawn from reserves available for this purpose, less
any losses brought forward and sums placed to reserve in accordance with the law
or the statutes”.^15
In other words, the Second Directive sets out two cumulative restrictions: the
net assets of the company and the net profits of the previous financial year. As this
is a minimum requirement, Member States’ laws may restrict the distribution of
funds even more.^16
What does the term distribution mean? The term “distribution” has not been de-
fined in the Second Directive and is therefore a matter of interpretation of Com-
munity law.^17 This can increase legal risk.
For example, is the sale of assets at an undervalue to a buyer who happens to be
a shareholder a form of “distribution” under Community law? Is the extension of
credit on terms that are more favourable than market terms or in a situation where
no third party would have received a credit a form of “distribution”?
The wording of the Second Directive implies that the term “distribution” must
mean a transaction that reduces net assets set out in the company’s annual ac-
counts.^18
The German Aktiengesetz prohibits hidden distributions.^19 Distributions must therefore be
made in compliance with the statutory procedure. In England, “it would be ultra vires the
company to distribute assets of a company to the shareholders other than by way of a distri-
bution of profit lawfully made or by a reduction in capital duly sanctioned by the court or
possibly a return of capital by the adoption of a special procedure under the Companies
(^12) Article 15(1)(d) of Directive 77/91/EEC (Second Company Law Directive). For German
law, see § 30(1) GmbHG.
(^13) Article 15(2) of Directive 77/91/EEC (Second Company Law Directive).
(^14) Article 15(1)(a) of Directive 77/91/EEC (Second Company Law Directive).
(^15) Article 15(1)(c) of Directive 77/91/EEC (Second Company Law Directive).
(^16) Schwarz GC, Europäisches Gesellschaftsrecht. Nomos, Baden-Baden (2000) pp 379–
- For German law, see § 30(1) GmbHG and § 57 AktG.
(^17) See Werlauff E, EU Company Law. Second Edition. DJØF Publishing, Copenhagen
(2003) p 280: “Community law contains no direct provisions on disguised or secret dis-
tribution to the shareholders.”
(^18) See Schwarz GC, Europäisches Gesellschaftsrecht. Nomos, Baden-Baden (2000) p 379:
“Unter Ausschüttungen sind ... alle Leistungen zu verstehen, durch die eine – in Art. 15
Abs. 1 Buchst. A Zweite RiL definierte – Unterbilanz herbeigeführt oder vertieft wird.”
(^19) § 57 AktG.