Recently published proposal of the Slovenian Strategy on the management of state-owned assets contains a plan to limit the concentration of ownership in companies, privatized through an IPO.
Such limitation is planned to be regulated in the companies’ Articles of Association (hereafter: Articles). However, when limiting the concentration of ownership in privatized companies, Slovenian state shall observe EU rules on the free movement of capital.
Restriction of transferability of the shares
Concentration of ownership could be limited by restricting transferability of the shares in the Articles of the company, i.e. Articles may provide that a consent of the company must be obtained in order to transfer the shares of such company. Moreover, the authority to issues the consent may be entrusted to the general meeting in combination with the requested qualified majority of 75% of the votes for the decision. By amending the Articles in the described manner, while still a predominant owner of the companies to be privatized, the state could control further transfers of company’s shares by owning only 25% plus one share of the company. Furthermore, any amendments of the Articles will be subject to the state’s consent, as the 75% majority is required to amend the Articles.
Golden shares jurisprudence of CJEU
In two generation of the »golden shares cases«, the Court of Justice of the European Union (CJEU) has assessed various attempts by the Member States to retain certain level of control in privatized companies by using the control enhancing mechanisms (CEM). Variants of CEM’s used by the Member States include limitation of voting rights, veto power of the state in capacity of a shareholder, special appointment rights, supermajority requirements and also the requirements to obtain a consent of the public authorities prior to acquisition of certain level of shares of privatized companies. In most cases, CJEU ruled that the aforementioned measures restricted the free movement of capital and were incompatible with article 63 of the Treaty on the Functioning of the European Union (TFEU).
Three factors have proved to be decisive for the assessment of the measures that could breach the free movement of capital rules: (i) Can the measure be qualified as a state measure? (ii) Is the measure restricting the free movement of capital? (iii) Is the restriction justified?
To fall within the scope of the free movement of capital rules, a measure must be attributable to the state or to another kind of public authority. A specific situation arises when the state acts as a (private) shareholder of a particular company. There, the question whether the state used any of its authority or the measure resulted from normal operations of company law is decisive.
A definition of restriction of the free movement of capital has been interpreted very broadly. Not only have discriminatory measures restricting or limiting investments of nationals / residents of other member states in companies of a particular Member State been recognized as a restriction, the definition also includes all measures deterring investors from other Member States (by making direct or portfolio investments less attractive), even though they apply without distinction to both residents and nonresidents of a Member State.
Only in one case CJEU found the restriction on the free movement of capital justified, namely Belgian golden share enabling the state’s veto on certain decisions and appointment of two members of the board was justified by overriding reasons in the general interest, i.e. safeguarding of a country’s energy supplies. According to CJEU, restrictions on the free movement of capital may also be justified on other grounds such as a guarantee of universal postal service or protection of consumers, workers or minority shareholders. However, until now most of the measures were not proportionate and thus not justified.
It remains to be seen how the planned limitation of the concentration of ownership will be carried out in Slovenia. In any way, free movement of capital shall not be restricted or the restriction shall not go beyond what is necessary in order to attain the objective in the general interest. Prior to the assessment of potential justifications, an interesting question might arise in regard to the classification of a “state measure”. If Slovenian state limits the concentration of ownership in privatized companies solely by using normal operations of company law in the capacity of a shareholder, such case could lead to further development of the CJEU golden shares jurisprudence.
By Primoz Mikolic, Associate, ODI Law Firm
