10.2 Cash Payments by the Company 339If the acquisition was not lawful, the shares must be disposed of within one
year.^62 In some exceptional cases, the company may acquire its shares but has to
dispose of them or cancel them within not more than three years of their acquisi-
tion.^63
It is normal for the company to cancel shares. In fact, many of the core objec-
tives of share buy-back programmes would not be achieved otherwise.
Pre-emption rights. Although not required by the Second Directive,^64 existing
shareholders can have pre-emption rights under the laws of some Member States
when the company disposes of its shares otherwise than by cancelling them. In
this case, the decision to sell those shares must be preceded by a decision to waive
pre-emption rights. This is a further factor that makes it easier in many countries
to cancel shares rather than sell them.
Mandatory bid. If the company cancels shares, each remaining shareholder will
end up holding a slightly larger percentage of the company’s shares. If the com-
pany acquires its own shares, each remaining shareholder will have a slightly lar-
ger percentage of votes, as the right to vote attaching to the company’s own shares
must be suspended.^65 If the firm has a large shareholder, both situations can mean
that a threshold that will trigger an obligation to make a mandatory bid will be
reached.^66
Usual ways to mitigate this risk include: the sale of shares by that shareholder;
the issuing of new shares that will not be subscribed for by that shareholder; and
prior approval by the supervisory authority.
However, the obligation to make a mandatory bid might be triggered under the
provisions of Member States’ national laws, if they are more stringent than those
of the Directive on takeover bids.^67 According to the wording of the Directive, the
duty to make a mandatory bid will only be triggered where a person holds securi-
ties giving him/her a specified percentage of voting rights in the company “as a re-
sult of his/her own acquisition or the acquisition by persons acting in concert with
him/her”.^68 This is arguably not the case where that threshold is reached as a result
of share buy-backs or the cancelling of shares.
Summary: Community provisions impose limits on the company’s right to ac-
quire its own shares. Constraints based on Community law apply to public lim-
ited-liability companies in general, and to companies whose shares have been ad-
mitted to trading on a regulated market in the EU. Similar constraints can apply to
private limited-liability companies under the national provisions of Member
States’ laws. The main constraints based on Community law can be summarised
as follows:
(^62) Article 21 of Directive 77/91/EEC (Second Company Law Directive).
(^63) Article 20 of Directive 77/91/EEC (Second Company Law Directive).
(^64) Article 29(1) of Directive 77/91/EEC (Second Company Law Directive).
(^65) Article 22(1) of Directive 77/91/EEC (Second Company Law Directive).
(^66) See, for example, Stattin D, Dispenser från budplikt vid Volkswagens köp av Scania-
aktier, JT 2007–08 pp 873–881.
(^67) Article 3(2)(b) of Directive 2004/25/EC (Directive on takeover bids).
(^68) Article 5(1) of Directive 2004/25/EC (Directive on takeover bids).