Court of Justice of the European Communities (including Court of First Instance Decisions)

Freedom of movement for persons ° Freedom of establishment ° Companies ° Directive 77/91 ° Change in the capital of a public limited company ° Shareholders' right of pre-emption provided for in the event of an increase in capital by contributions in cash ° National legislation granting a right of pre-emption in the event of an increase in capital by contributions in kind ° Permissibility
(Council Directive 77/91, Art. 29(1) and (4))

The Second Council Directive (77/91/EEC) on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, in particular Article 29(1) and (4), does not preclude a Member State' s domestic law from granting a right of pre-emption to shareholders in the event of an increase in capital by consideration in kind and from subjecting the legality of a decision withdrawing that right of pre-emption to a substantive review which secures a higher level of protection for shareholders than that required by Article 29(4) of the directive in the case of contributions in cash.
The fact that that provision does not refer to increases in capital by consideration in kind does not mean that the conclusion can be drawn that the Community legislator elected to restrict the shareholders' right of pre-emption to increases in capital by consideration in cash, thereby precluding Member States from extending it also to increases in capital by consideration in kind. On the contrary, since the Second Directive merely prescribes a right of pre-emption in the event of increases in capital by consideration in cash, whilst refraining from laying down rules on the complex situation ° unknown in most Member States ° where the right of pre -emption is exercised in the event of increases in capital by consideration in kind, it left Member States at liberty to provide or not to provide for a right of pre-emption in the latter case. In addition, a national rule extending the principle that shareholders should have a right of pre-emption to increases in capital by consideration in kind, while providing for the possibility of restricting or withdrawing that right in certain circumstances, is consistent with one of the aims of the Second Directive, namely that of ensuring more effective protection for shareholders.

In Case C-42/95,
REFERENCE to the Court under Article 177 of the EC Treaty by the Bundesgerichtshof for a preliminary ruling in the proceedings pending before that court between
Siemens AG
and
Henry Nold,
on the interpretation of the Second Council Directive (77/91/EEC) of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (OJ 1977 L 26, p. 1), in particular Article 29(1) and (4) thereof,
THE COURT,
composed of: G.C. Rodríguez Iglesias, President, G.F. Mancini, J.C. Moitinho de Almeida and J.L. Murray (Presidents of Chambers), P.J.G. Kapteyn (Rapporteur), C. Gulmann, D.A.O. Edward, J.-P. Puissochet, G. Hirsch, P. Jann and H. Ragnemalm, Judges,
Advocate General: G. Tesauro,
Registrar: H. von Holstein, Deputy Registrar,
after considering the written observations submitted on behalf of:
° Siemens AG, by Oliver C. Braendel, Rechtsanwalt, Karlsruhe-Durlach,
° Mr Nold, by Hans Norbert Goetz, Rechtsanwalt, Karlsruhe,
° the Italian Government, by Professor Umberto Leanza, Head of the Department for Contentious Diplomatic Affairs of the Ministry of Foreign Affairs, acting as Agent, assisted by Ivo M. Braguglia, Avvocato dello Stato,
° the Finnish Government, by Holger Rotkirch, Ambassador, Head of the Legal Affairs Department of the Ministry of Foreign Affairs, acting as Agent,
° the Commission of the European Communities, by Antonio Caeiro and Juergen Grunwald, Legal Advisers, acting as Agents,
having regard to the Report for the Hearing,
after hearing the oral observations of Siemens AG, Mr Nold and the Commission at the hearing on 2 July 1996,
after hearing the Opinion of the Advocate General at the sitting on 19 September 1996,
gives the following
Judgment

1 By order of 30 January 1995, received at the Court on 23 February 1995, the Bundesgerichtshof (Federal Court of Justice) referred to the Court for a preliminary ruling under Article 177 of the EC Treaty a question on the interpretation of the Second Council Directive (77/91/EEC) of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent (OJ 1977 L 26, p. 1; "the Second Directive"), in particular Article 29(1) and (4).
2 The question was raised in proceedings between Siemens AG ("Siemens"), a company incorporated under the laws of Germany, and one of its shareholders, Mr Nold, who seeks to have set aside a resolution of Siemens' general meeting authorizing the management board to carry out an increase in capital by issuing ordinary shares up to a specified ceiling in return for consideration in cash or in kind. The increase in capital was purportedly intended, inter alia, to enable shares to be offered to employees and holdings to be acquired in other companies. By its resolution giving authority to the management board, the general meeting withdrew the shareholders' right of pre-emption.
3 The order for reference states that under German company law any shareholder who so requests is entitled to be allocated some of the new shares in proportion to the capital represented by his shares in the event of an increase in capital for consideration either in cash or in kind. That right of pre-emption may not be withdrawn by the general meeting unless ° among a number of other conditions ° the management board has presented a written report setting out the reasons for withdrawing the right of pre-emption and justifying the proposed issue price.
4 In addition, the Bundesgerichtshof has formulated case-law, which, through the imposition of supplementary conditions, subjects resolutions of the general meeting providing for the withdrawal of the shareholders' right of preemption to substantive review.
5 Accordingly, in a judgment of 13 March 1978 (BGHZ 71, 40), the Bundesgerichtshof held that the shareholders' right of pre-emption could be withdrawn only if, having regard to the resulting consequences for shareholders from whom it is withdrawn, such a measure is justified on objective grounds in the company' s interest. Reviewing that objective condition of validity entails considering the respective interests of the company and the shareholders and whether the means are proportionate to the intended aim.
6 Furthermore, in a judgment of 19 April 1982 (BGHZ 83, 319), which was concerned with an increase in capital within the limits of the authorized capital, the Bundesgerichtshof held that, if the general meeting resolves to withdraw the right of pre-emption in the actual resolution authorizing the increase, the aforementioned conditions must be publicized at the time of the resolution and be sufficiently certain as to enable them to be assessed by the general meeting.
7 In this case, the Bundesgerichtshof held that the resolution of Siemens' general meeting did not satisfy the conditions set out in its case-law in so far as it withdrew the shareholders' right of pre-emption in the event of the issue of ordinary shares in return for acquisitions of holdings in other companies, and therefore had to be regarded as unlawful.
8 The national court has, however, expressed doubts as to the compatibility of its case-law with Article 29 of the Second Directive, paragraph 1 of which provides for a right of pre-emption only where the capital is increased by consideration in cash, with the result that the rule set out in paragraph 4 may not apply to increases in capital by consideration in kind.
9 Paragraphs 1 and 4 of Article 29 provide as follows:
"1. Whenever the capital is increased by consideration in cash, the shares must be offered on a pre-emptive basis to shareholders in proportion to the capital represented by their shares.
...
4. The right of pre-emption may not be restricted or withdrawn by the statutes or instrument of incorporation. This may, however, be done by decision of the general meeting. The administrative or management body shall be required to present to such a meeting a written report indicating the reasons for restriction or withdrawal of the right of pre-emption, and justifying the proposed issue price. The general meeting shall act in accordance with the rules for a quorum and a majority laid down in Article 40. Its decision shall be published in the manner laid down by the laws of each Member State, in accordance with Article 3 of Directive 68/151/EEC."
10 The Bundesgerichtshof takes the view that if that provision had to be interpreted as meaning that an increase in capital for consideration in kind is not subject to any condition designed to protect shareholders against depreciation of their shares, but is subject only to review to establish possible abuse, it would preclude the substantive review laid down in its case-law in so far as that review would subject resolutions of the general meeting providing for an increase in capital by consideration in kind and involving concurrent withdrawal of the shareholders' right of pre-emption to considerably stricter requirements than those necessitated by a mere review to establish possible abuse.
11 In those circumstances, the national court stayed proceedings and referred the following question to the Court for a preliminary ruling:
"Is it compatible with the Second Council Directive of 13 December 1976 (77/91/EEC; OJ 1977 L 26, p. 1), in particular Article 29(1) and (4) thereof, for the legality of a resolution of a general meeting of shareholders relating to an increase in capital in return for contributions in kind while at the same withdrawing the shareholders' right of pre-emption to be determined on the basis of a substantive review in accordance with the principles laid down in the Bundesgerichtshof' s judgments of 13 March 1978 (BGHZ 71, 40) and 19 April 1982 (BGHZ 83, 319)?"
12 By its question the national court essentially seeks to establish whether the Second Directive, in particular Article 29(1) and (4) thereof, precludes a Member State' s domestic law from granting a right of pre-emption to shareholders in the event of an increase in capital by consideration in kind and from subjecting the legality of a decision withdrawing that right of pre-emption to a substantive review of the kind evolved by the Bundesgerichtshof.
13 It should be borne in mind that the Second Directive seeks, pursuant to Article 54(3)(g) of the EC Treaty, to coordinate the safeguards which, for the protection of the interests of members and others, are required of companies within the meaning of the second paragraph of Article 58 of the Treaty with a view to making such safeguards equivalent. According to the second recital in the preamble thereto, the Second Directive is therefore intended to ensure minimum equivalent protection for both shareholders and creditors of public limited liability companies.
14 Article 29(1) of the Second Directive provides that whenever the capital is increased by consideration in cash, the shares must be offered on a pre-emptive basis to shareholders in proportion to the capital represented by their shares. Article 29(4) authorizes the general meeting in certain circumstances to decide to restrict or withdraw that right.
15 It appears from the very wording of that provision that it applies only to cases in which the capital is increased by consideration in cash.
16 The fact that that provision does not refer to increases in capital by consideration in kind does not mean that the conclusion can be drawn that the Community legislator elected to restrict the shareholders' right of pre-emption to increases in capital by consideration in cash, thereby precluding Member States from extending it also to increases in capital by consideration in kind.
17 Contrary to the arguments put forward by Siemens, neither does that conclusion follow from the fact that Article 27 of the Second Directive, which is among the provisions on increases in capital by consideration other than in cash, does not introduce a right of pre-emption for shareholders.
18 On the contrary, since the Second Directive merely prescribes a right of pre-emption in the event of increases in capital by consideration in cash, whilst refraining from laying down rules on the complex situation ° unknown in most Member States ° where the right of pre-emption is exercised in the event of increases in capital by consideration in kind, it left Member States at liberty to provide or not to provide for a right of pre-emption in the latter case.
19 In addition, a national rule extending the principle that shareholders should have a right of pre-emption to increases in capital by consideration in kind, while providing for the possibility of restricting or withdrawing that right in certain circumstances, is consistent with one of the aims of the Second Directive, namely that of ensuring more effective protection for shareholders. Indeed, such a rule enables shareholders to avoid the fraction of the capital represented by their shareholdings from being diluted also in such an event.
20 According to Siemens, however, a substantive review of decisions of the general meeting withdrawing the right of pre-emption on the occasion of an increase in capital by consideration in kind, such as the review laid down by the Bundesgerichtshof' s case-law, is not consistent with the aims of the Second Directive. It argues that that case-law protects the right of pre-emption disproportionately in so far as it makes it possible for minority shareholders to challenge decisions of the general meeting in order to block increases in capital to the detriment of the company and its creditors.
21 It must be held in this regard that a substantive review, such as the one at issue, which ensures a high degree of protection for shareholders, does not run counter to the aims of the Second Directive, even if it might give rise to delays in carrying out increases in capital. Moreover, it is for the national courts to utilize such remedies as are available to them under their domestic law in order to penalize delaying or manifestly unfounded actions, whilst having due regard to the aims of the directive.
22 In the light of the foregoing considerations, the answer to be given to the national court is that the Second Directive, in particular Article 29(1) and (4) thereof, does not preclude a Member State' s domestic law from granting a right of pre-emption to shareholders in the event of an increase in capital by consideration in kind and from subjecting the legality of a decision withdrawing that right of pre-emption to a substantive review of the kind laid down by the Bundesgerichtshof.

Costs
23 The costs incurred by the Italian and Finnish Governments and the Commission of the European Communities, which have submitted observations to the Court, are not recoverable. Since these proceedings are, for the parties to the main proceedings, a step in the proceedings pending before the national court, the decision on costs is a matter for that court.

On those grounds,
THE COURT,
in answer to the question referred to it by the Bundesgerichtshof, by order of 30 January 1995, hereby rules:
The Second Council Directive (77/91/EEC) of 13 December 1976 on coordination of safeguards which, for the protection of the interests of members and others, are required by Member States of companies within the meaning of the second paragraph of Article 58 of the Treaty, in respect of the formation of public limited liability companies and the maintenance and alteration of their capital, with a view to making such safeguards equivalent, in particular Article 29(1) and (4) thereof, does not preclude a Member State' s domestic law from granting a right of pre-emption to shareholders in the event of an increase in capital by consideration in kind and from subjecting the legality of a decision withdrawing that right of pre-emption to a substantive review of the kind laid down by the Bundesgerichtshof.