10.2 Cash Payments by the Company 335- Member States have a right but not a duty to authorise the redemption of the
subscribed capital without its reduction. - If they do, the conditions set out in Article 35 of the Second Company Law Di-
rective must be complied with. - The conditions depend on whether the articles of association provide for re-
demption or not. If they do, the redemption must be decided on by the general
meeting voting at least under the usual conditions of quorum and majority. If
they do not provide for redemption, redemption must be decided on by the ge-
neral meeting acting at least under special conditions of quorum and majority.^39
In both cases, there must be a separate vote for each class of shareholders who-
se rights are affected by the transaction.^40 - Only sums which are available for distribution may be used for redemption
purposes.^41
10.2.4 Share Buy-backs
Especially in listed companies, share buy-backs are a popular way to return funds
to shareholders. Share buy-backs can be in the interests of both the firm and its
long-term and short-term shareholders.
First, share buy-backs are a way to manage the debt-to-equity ratio (section
5.5). Share buy-backs increase leverage.
Second, share buy-backs can increase share price in the short term by increas-
ing demand or otherwise. An increase in share price at least in the short term is in
the interests of activist short-term shareholders such as hedge funds. Hedge funds
and other vocal shareholders often try to force the company to increase share price
through share buy-back programmes and special dividends.
Third, share buy-backs can help to stabilise share price. Less volatility, a stable
increase in the share price, and lower perceived risk can mean that investors are
prepared to pay more for shares. This can reduce the firm’s funding costs in the
long term.
Fourth, share buy-backs reduce the amount of assets that can be distributed to
shareholders and can therefore function as a takeover defence. It is more difficult
and more expensive to refinance an LBO, if there are hardly any assets that the
target company can distribute to its new owners after a takeover.
(^39) Article 40(1) of Directive 77/91/EEC (Second Company Law Directive): “The laws of
the Member States shall provide that the decisions referred to in Articles 29 (4) and (5),
30, 31, 35 and 38 must be taken at least by a majority of not less than two-thirds of the
votes attaching to the securities or the subscribed capital represented.” Article 40(2):
“The laws of the Member States may, however, lay down that a simple majority of the
votes specified in paragraph 1 is sufficient when at least half the subscribed capital is
represented.”
(^40) Article 38 of Directive 77/91/EEC (Second Company Law Directive).
(^41) See Article 15(1) of Directive 77/91/EEC (Second Company Law Directive).