Last week was a busy week for the Court of Justice (read here and here). A third judgment worth mentioning is the Dowling and Others judgment (read here). This judgment concerns the position of shareholders (of institutions of systemic importance) in times of financial crisis.
The dispute in the main proceedings concerned Permanent TSB plc, formerly Irish Life and Permanent plc, (‘ILP’) a credit institution operating in Ireland, and Permanent TSB Group Holdings plc, formerly Irish Life and Permanent Group Holdings plc, (‘ILPGH’) a company incorporated with limited liability in Ireland. During the period at issue in the main proceedings, ILPGH owned the entire share capital of ILP. The applicants in the main proceedings were members and shareholders of ILPGH.
In execution of its agreement with the European troika, Ireland sought to recapitalise its banks. ILP required a capital increase of EUR 4 billion. In July 2011 the Minister for Finance submitted a proposal designed to facilitate the recapitalisation of ILP by means of, inter alia, a capital injection of EUR 2.7 billion. This proposal was rejected by the shareholders of ILPGH. In order to recapitalise ILP, the Minister for Finance subsequently prepared a Proposed Direction Order, which he submitted to the High Court. The Direction Order was adopted by the High Court in the terms sought by the Minister, directing ILPGH to issue, in return for the capital injection of EUR 2.7 billion, new shares to the Minister at a share price 10% below the quoted share price of 23 June 2011. Consequently, the Minister obtained, without any decision having been made by the general meeting of shareholders of ILPGH, 99.2% of the shares of that company.
The shareholders of ILPGH revolted, claiming that the Direction Order violated their rights under the Second (Company Law) Directive. Article 8 of the Second Directive prohibits shares being issued at a price lower than their nominal value, or, where there is no nominal value, their accountable par. Article 25 of that directive provides that, as a general rule, any increase in the share capital of a public limited liability company must be decided by the general meeting of its shareholders. Article 29 of that directive provides, in essence, that, in the event of such an increase in share capital, the shares must be offered on a pre-emptive basis to the existing shareholders. The Direction Order clearly violated these requirements. Does this make the Direction Order illegal, as argued by the shareholders of ILPGH?
The Court of Justice of Justice disagrees. The aim of the Second Directive is to achieve minimum equivalent protection for both shareholders and creditors of public limited liability companies. The measures provided for by that directive relating to the formation of public limited liability companies and to the maintenance, increase or reduction of their capital guarantee such protection against acts taken by the governing bodies of those companies and relate, therefore, to their normal operation. The Direction Order, however, is not a measure taken by a governing body of a public limited liability company as part of its normal operation, but is an exceptional measure taken by the national authorities intended to prevent, by means of an increase in share capital, the failure of such a company, which failure would threaten the financial stability of the European Union. The protection conferred by the Second Directive does not extend to a national measure that is adopted in a situation where there is a serious disturbance of the economy and financial system of a Member State and that is designed to overcome a systemic threat to the financial stability of the European Union, due to a capital shortfall in the company concerned. Extraordinary times call for extraordinary measures.
The Dowling and Others judgment invites a more general reflection about the position of shareholders in times of financial crisis (see here).