40. The Second Company Law Directive /The Greek Cases
40.1 The applicants rely on a series of preliminary rulings of the European Court of Justice (as it then was). This body of case law has been referred to as “the Greek Cases”.
40.2 The first of this line of cases was the case of Sindesmos Melon & Ors v The Greek State & Ors (C-381/89). The preliminary ruling of the Court concerned the interpretation of Articles 25(1) and 29(1) of the Second Company Directive, 77/91/EC which read as follows:
Article 25
1. Any increase in capital must be decided upon by the general meeting. Both this decision and the increase in the subscribed capital 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.
…
Article 29
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.
40.3 The court found that the safeguards in the directive may be relied upon by individuals against the public authorities before the national courts. The Court held that the provisions of the directive are to be interpreted as precluding the application of rules which allow an increase of capital to be decided upon by administrative measure, without any resolution being passed by a general meeting of shareholders. The provisions of the directive also preclude national rules which enable a decision to be taken, by administrative measure, that new shares are to be allotted without being offered on a pre-emptive basis to the shareholders in proportion to the capital represented by their shares. The court observed that
“There is no provision, either in the EEC Treaty or in the Second Directive itself, which allows the Member States to derogate from Articles 25(1) and 29(1) of the Second Directive when there is a crisis. On the contrary, Article 17(1) of the directive expressly provides that in the case of a serious loss of the subscribed capital, a general meeting of shareholders must be called, within the period laid down by the laws of the Member States, to consider whether the company should be wound up or any other measures taken. That provision thus confirms the decision-making power of the general meeting provided for in Article 25(1), even where the company in question is experiencing serious financial difficulties, and does not allow any derogation whatsoever from the pre-emptive right provided for in Article 29(1).”
40.4 In the case of Karella and Karellas v Minister for Industry, Energy and Technology & OAE (C-19/90 and C-20/90), the plaintiffs were shareholders in a company called Klostiria Velka AE which, as a result of certain difficulties in the company, came under the administration of a body called Organismos Anasygkrotiseos Epicheiriseon, (OAE, translated as Business Reconstruction Organisation).
40.5 The OAE was a public sector body in the form of a limited liability company which purported to act in the public interest under the control of the State. The purpose of the OAE was to “contribute to the economic and social development of the country through the financial rejuvenation of undertakings … and through the establishment and operation of nationalised or mixed economy undertakings”. National law conferred certain powers on the OAE to achieve those objectives. The OAE was permitted by national law, during its provisional administration of a company, to increase the capital of the company concerned. This was subject to the approval of the Minister for Industry, Energy and Technology. The plaintiffs proceeded to bring actions for the annulment of the decree arguing that it was contrary to articles 25, 41(1) and 42 of the Second Directive. Those articles are reproduced below.
Article 25
1. Any increase in capital must be decided upon by the general meeting. Both this decision and the increase in the subscribed capital 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.
2. Nevertheless, the statutes or instrument of incorporation or the general meeting, the decision of which must be published in accordance with the rules referred to in paragraph 1, may authorize an increase in the subscribed capital up to a maximum amount which they shall fix with due regard for any maximum amount provided for by law. Where appropriate, the increase in the subscribed capital shall be decided on within the limits of the amount fixed, by the company body empowered to do so. The power of such body in this respect shall be for a maximum period of five years and may be renewed one or more times by the general meeting, each time for a period not exceeding five years.
3. Where there are several classes of shares, the decision by the general meeting concerning the increase in capital referred to in paragraph 1 or the authorization to increase the capital referred to in paragraph 2, shall be subject to a separate vote at least for each class of shareholder whose rights are affected by the transaction.
4. This Article shall apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares, but not to the conversion of such securities, nor to the exercise of the right to subscribe.
…
Article 41
1. Member States may derogate from Article 9 (1), Article 19 (1) (a), first sentence, and (b) and from Articles 25, 26 and 29 to the extent that such derogations are necessary for the adoption or application of provisions designed to encourage the participation of employees, or other groups of persons defined by national law, in the capital of undertakings.
…
Article 42
For the purposes of the implementation of this Directive, the laws of the Member States shall ensure equal treatment to all shareholders who are in the same position.
40.6 The national court referred the case to the European Court of Justice for a preliminary ruling on the interpretation of certain aspects of the directive.
40.7 The Court found that the aspects of the Second Company Directive regarding the formation of public limited liability companies and the maintenance and alteration of their capital may be relied upon by individuals against public authorities before national courts. They held that any increase in capital must be decided upon in a general meeting and that the provisions providing for such are sufficiently precise that they were held to have direct effect. The Court held that Article 25 and article 41 (1) of the Directive precluded national rules which seek to allow an administrative action to increase the company capital. They observed that
“ As far as the field of application of the Second Directive is concerned, it should be stated first of all that, in accordance with Article 54(3)(g) of the Treaty, it seeks to coordinate the safeguards which, for the protection of the interests of members and others, are required by Member States of companies and firms within the meaning of the second paragraph of Article 58 of the Treaty with a view to making such safeguards equivalent. Consequently, the aim of the Second Directive is to provide a minimum level of protection for shareholders in all the Member States.
That objective would be seriously frustrated if the Member States were entitled to derogate from the provisions of the directive by maintaining in force rules - even rules categorized as special or exceptional - under which it is possible to decide by administrative measure, outside any decision by the general meeting of shareholders, to effect an increase in the company' s capital which would have the effect either of obliging the original shareholders to increase their contributions to the capital or of imposing on them the addition of new shareholders, thus reducing their involvement in the decision-taking power of the company.
However, that observation does not signify that Community law prevents Member States from derogating from those provisions in any circumstances. The Community legislature has made specific provision for well-defined derogations and for procedures which may result in such derogations with the aim of safeguarding certain vital interests of the Member States which are liable to be affected in exceptional situations. Instances of this are Articles 19(2) and (3), Article 40(2), Article 41(2) and Article 43(2) of the directive.
In this connection, it must be held that no derogating provision which would allow the Member States to derogate from Article 25(1) of the directive in crisis situations is provided for either in the EEC Treaty or in the Second Directive itself. On the contrary, Article 17(1) of the directive provides expressly that, in the case of a serious loss of the subscribed capital, a general meeting of shareholders must be called within the period laid down by the laws of the Member States to consider whether the company should be wound up or any other measures taken. Consequently, that provision confirms the principle laid down by Article 25(1) and applies even where the company concerned is undergoing serious financial difficulties.”
40.8 In Kerafina v The Greek State (C-134/91 and C -135/91), in a similar set of facts to Karella, the court reinforced the position set out in that case, that the Second Directive may be relied upon by individuals against the public authorities before national courts. The Court acknowledged the discretion conferred on the Commission by Article 93 of the Treaty (now Article 88) in relation to State aid. However, it held that such discretion does not permit the Commission to derogate from provisions of community law. Consequently, the Court found that a decision adopted under Article 93 of the Treaty does not allow a member state to maintain a national provision which is contrary to the Second Directive.
40.9 In the case of Pafitis & Ors v Trapeza Kentrikis Ellados AE & Ors (C-441/93), the Court held that national rules providing for an increase by an administrative measure of the capital of a bank which is in financial difficulty were impermissible. Mr Pafitis and fellow shareholders in Trapeza Kentrikis Ellados Bank challenged a decision whereby a temporary administrator to the bank had increased the capital to the bank in an effort to stabilise the conduct of its business. The statutes of the bank were amended in order to allow the temporary administrator to increase the bank’s capital without a general meeting of the shareholders. The temporary administrator had published a notice in the press inviting the shareholders to exercise their pre-emptive rights and participate in the increase within a 30 day period. The national court referred a number of questions on the interpretation of Articles 25 and 29 to the Court of Justice.
40.10 The Court considered that the objective of the Second Directive is to ensure a minimum level of protection for shareholders. They held that that objective would be frustrated if member states were permitted to derogate from the provisions of the directive by maintaining rules which allow for an administrative measure to be made—even in an exceptional situation by reason of debt burden—which increases the capital of the company in the absence of a meeting of its shareholders. The court emphasised that
“…Article 25, which, in accordance with the objective of the Second Directive, provides a minimum level of protection for shareholders in all the Member States, applies, in the absence of any express exception, to credit institutions under the same conditions as to any other undertaking which is of special importance to the national economy and, by reason of its debt burden, is in exceptional circumstances.”
40.11 They also held that publication of an offer of subscription in daily newspapers does not constitute information given in writing to the shareholders of registered shares within the meaning of Article 29(3) of the Second Directive.
40.12 In rejecting the defendants’ argument that the lex specialis status of banking legislation is closely linked to the fact that supervisory rules are provisions dictated by the public interest, the court found as follows:
“It is true that considerations concerning the need to protect the interests of savers and, more generally, the equilibrium of the savings system, require strict supervisory rules in order to ensure the continuing stability of the banking system.
However, it does not follow that national rules of that kind must necessarily provide for measures which deprive the organs of a credit institution of the powers vested in them, as organs of a public limited liability company, by Article 25 of the Second Directive.
The interests at issue can, as the Advocate General has rightly pointed out in point 18 of his Opinion, be given equal and appropriate protection by other means, such as for example the creation of a generalized system to guarantee deposits, which seek to achieve the same result but do not impede attainment of the objective pursued by the Second Directive of providing a minimum level of protection for shareholders in all the Member States.
Accordingly, the Member States could, in the event of their supervisory rules for credit institutions not meeting the requirements laid down by the Second Directive, adopt the measures needed to bring them into line with those requirements within the prescribed period and establish a system which, whilst observing the provisions of the directive, protects the interests concerned.”
40.13 In Diamantis v The Greek State & OAE (C-373/97), the plaintiff was a shareholder in the company Plastika Kavalas AE which was placed under provisional administration by the OAE. He took an action in the national court seeking a declaration that alterations in the capital of the company (two increases and one reduction) were invalid on the ground that they were contrary to the provisions of the Second Directive. The Greek State argued that Mr. Diamantis was abusing his rights as a shareholder for a number of reasons, including his failure to exercise his pre-emption rights at the time of the first increase. The national court accepted that certain provisions in Greek domestic law could defeat rights arising under community law (in the Second Directive) in situations where there had been an abuse of rights. They considered, however, that issues of interpretation arose in respect of articles 25(1) and 29(1) of the Second Directive. Accordingly, they requested a preliminary ruling, primarily on the issue of whether a national provision which penalises abuse of rights may validly be relied on to defeat an action for a declaration that certain measures are invalid on the basis of a breach of a right conferred by Article 25 of the Second Directive.
40.14 The Court held that Community law cannot be relied on for abusive or fraudulent ends and it does not preclude the application by national courts of provisions of national law in order to assess the whether a right arising from community law is being exercised abusively. Such a national rule, however, must not prejudice the full and uniform application of community law in the member state. The court set out its ruling in the following terms:
“Community law does not preclude national courts from applying a provision of national law which enables them to determine whether a right deriving from a Community law provision is being abused. However, in making that determination, it is not permissible to deem a shareholder relying on Article 25(1) of the Second Directive to be abusing his rights under that provision merely because he is a minority shareholder of a company subject to reorganisation measures, or has benefited from reorganisation of the company, or has not exercised his right of pre-emption, or was among the shareholders who asked for the company to be placed under the scheme applicable to companies in serious difficulties, or has allowed a certain period of time to elapse before bringing his action. In contrast, Community law does not preclude national courts from applying the provision of national law concerned if, of the remedies available for a situation that has arisen in breach of that provision, a shareholder has chosen a remedy that will cause such serious damage to the legitimate interests of others that it appears manifestly disproportionate.”
40.15 In the case of Kefalas & Ors v the Greek State 9C-367/96) the Court reemphasised the findings in Diamantis that national courts can apply provisions which seek to establish whether a right arising from community law is being exercised abusively. However, the court went on to specify that it is not open to national courts to alter the scope of such provisions or to compromise the objectives pursued by it. The court concluded as follows:
“In the light of the foregoing, the reply to the questions referred must be that Community law does not preclude national courts from applying a provision of national law in order to assess whether a right arising from a provision of Community law is being exercised abusively. However, where such an assessment is made, a shareholder relying on Article 25(1) of the Second Directive cannot be deemed to be abusing the right arising from that provision merely because the increase in capital contested by him has resolved the financial difficulties threatening the existence of the company concerned and has clearly enured to his economic benefit, or because he has not exercised his preferential right under Article 29(1) of the Second Directive to acquire new shares issued on the increase in capital at issue.”
40.16 In Commission v Spain (C-338/06), the First Chamber of the Court of Justice declared that Spain, in domestic legislation entitled Royal Legislative Decree 1564/1989 (“LSA”), had failed to fulfil its obligations under Article 29 of the Second Directive. Article 29 reads as follows:
Article 29
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.
2. The laws of a Member State: (a) need not apply paragraph 1 above to shares which carry a limited right to participate in distributions within the meaning of Article 15 and/or in the company's assets in the event of liquidation ; or
(b) may permit, where the subscribed capital of a company having several classes of shares carrying different rights with regard to voting, or participation in distributions within the meaning of Article 15 or in assets in the event of liquidation, is increased by issuing new shares in only one of these classes, the right of pre-emption of shareholders of the other classes to be exercised only after the exercise of this right by the shareholders of the class in which the new shares are being issued.
3. Any offer of subscription on a pre-emptive basis and the period within which this right must be exercised shall be published in the national gazette appointed in accordance with Directive 68/151/EEC. However, the laws of a Member State need not provide for such publication where all a company's shares are registered. In such case, all the company's shareholders must be informed in writing. The right of pre-emption must be exercised within a period which shall not be less than 14 days from the date of publication of the offer or from the date of dispatch of the letters to the shareholders.
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.
5. The laws of a Member State may provide that the statutes, the instrument of incorporation or the general meeting, acting in accordance with the rules for a quorum, a majority and publication set out in paragraph 4, may give the power to restrict or withdraw the right of pre-emption to the company body which is empowered to decide on an increase in subscribed capital within the limits of the authorized capital. This power may not be granted for a longer period than the power for which provision is made in Article 25 (2).
6. Paragraphs 1 to 5 shall apply to the issue of all securities which are convertible into shares or which carry the right to subscribe for shares, but not to the conversion of such securities, nor to the exercise of the right to subscribe.
7. The right of pre-emption is not excluded for the purposes of paragraphs 4 and 5 where, in accordance with the decision to increase the subscribed capital, shares are issued to banks or other financial institutions with a view to their being offered to shareholders of the company in accordance with paragraphs 1 and 3.
40.17 The Court found that Spain had, in contravention of Article 29 of the directive, granted a pre-emption right in respect of shares in the event of a capital increase by consideration in cash, not only to shareholders but also to holders of bonds convertible into shares. Article 29(1) and (6) of the directive requires new shares and convertible bonds to be offered on a pre-emptive basis to shareholders alone and only in so far as the shareholders have not exercised their right of pre-emption can those shares and bonds be offered to other purchasers, including, in particular, the holders of convertible bonds.
40.18 Finally, the Court held that Spain had failed to provide in its legislation that the shareholders’ meeting may decide to withdraw pre-emption rights in respect of bonds convertible into shares. The Court found in that respect, that national rules which make no express provision for the possibility of such withdrawal, would not be likely to create a situation which is sufficiently precise, clear and transparent in order to allow individuals to know the full extent of their rights and rely on them before the national courts. The court held as follows:
“It must be pointed out that even though … the Member States are free to adopt more restrictive conditions on withdrawal of the right of pre-emption at issue, the fact remains that Article 29(6) of the Second Directive, read in conjunction with Article 29(4), requires that, in certain circumstances, the general meeting of shareholders be able to decide to withdraw the right of pre-emption for all securities which are convertible into shares.
Clearly, as the Commission submits, the wording of Article 293 of the LSA makes no express provision for the possibility of such withdrawal.
Furthermore, whereas Article 293(3) provides that Article 158 of the LSA is applicable to the right of pre-emptive subscription, nowhere does it provide that Article 159 thereof, governing the right of pre-emption for new shares, is also applicable to the right of pre-emption for bonds convertible into shares.
Moreover, the systematic interpretation advocated by the Kingdom of Spain - to the effect that Article 293 of the LSA can only be interpreted as providing for the possibility to withdraw the right of pre-emption in question, since otherwise that article would be completely illogical - cannot be upheld.
In that regard, it must be borne in mind that, according to settled case-law, the need to ensure that Community law is fully applied requires Member States not only to bring their legislation into conformity with Community law but also to do so by adopting rules of law capable of creating a situation which is sufficiently precise, clear and transparent to allow individuals to know the full extent of their rights and rely on them before the national courts (Case 162/99 Commission v Italy [2001] ECR I-541, paragraph 22 and the case-law cited).
In the present case, even if Article 293 of the LSA could be interpreted contrary to its wording, as the Kingdom of Spain suggests, such an interpretation would be very unlikely to create a situation which is sufficiently precise, clear and transparent to allow individuals to know the full extent of their rights and rely on them before the national courts.
This is particularly the case since, as the Advocate General observes in point 89 of her Opinion, the Kingdom of Spain did not produce any specific evidence to show that Spanish courts interpret Article 293 of the LSA as providing for the possibility to withdraw the right of pre-emption for bonds convertible into shares.
It must therefore be held that, by failing to provide that the shareholders’ meeting may decide to withdraw pre-emption rights in respect of bonds convertible into shares, the Kingdom of Spain has failed to fulfil its obligations under Article 29(6) of the Second Directive, read in conjunction with Article 29(4) thereof.”
40.19 The applicants rely upon these cases for the proposition that the second Company Law Directive must be complied with, no matter what the circumstances, in the absence of any express provision for derogation. They say that no such derogation provision is to be found in any of the Treaty provisions. Further, they say that no implied derogation can be said to arise.
40.20 The respondents say that these cases must now be read in the light of the State’s obligations under Article 119 and 126, and Title VII of the TFEU generally, and the light of its obligations under the Programme for Support and the Implementing Decisions particularly.
40.21 The overarching submission is that the State was entitled as a matter of EU law to take necessary measures to defend the integrity of its own financial system, and was required as a matter of Treaty obligation to take the measures that it did in order to secure the safety of an institution of systemic importance for Ireland and the Union.
40.22 There was a specific, binding obligation to recapitalise ILP by the end of July 2011. On the evidence, this had to be done by direct State intervention and therefore it had to comply with the State aid rules. That, in turn, meant that the Minister had to take shares, at a price related to the market price. The shareholders having refused to agree to the proposal, it was necessary for the Minister to use his legal powers. It is submitted that EU law cannot apply to invalidate an order obtained for the purpose of fulfilling an EU legal obligation.
40.23 Specifically, it is submitted that the Second Company Law Directive could never render unlawful an act which a Member State has a legal obligation to take.
40.24 The respondents rely on Article 119(3) TFEU, which requires Member States to comply with the following guiding principles:
“Stable prices, sound public finances and monetary conditions and a sustainable balance of payments”;
40.25 Article 120, which provides that
“Member States shall conduct their economic policies with a view to contributing to the achievement of the objectives of the Union….”
and Article 126:
“Member States shall avoid excessive government deficits.”
40.26 It is submitted that, in the light of the evidence as to the potential consequences for Ireland and the Union if the recapitalisation did not happen, these provisions required the State to take the measures it did and must take precedence over any legislative measure.
40.27 It is submitted that the Greek cases, and the provisions of the Directive concerned, are in fact about company governance, dealing with the powers reserved to the members on the one hand and the company’s administrative structures on the other (in the case of Ireland, the board of the company). The use of terms in the judgments such as “administration” or “administrative measure” are said to relate to the administrative bodies of the company, including a situation where the State had imposed an administrator on the company.
40.28 The respondents submit, further, that the judgments do not cover a situation where the action taken is on foot of an order of a competent court. In their view the intervention of the court is a difference of fundamental importance and one which is not contemplated by the Directive. They point to other situations in which a court can alter decisions made about company capital, including the powers of the High Court in a petition under s.205 of the Companies Act, without any suggestion being made that the Directive is engaged.
40.29 It is submitted that no derogation from the Second Company Law Directive is required, but that if it is, such derogation can be found in the legal obligation to do what the Minister did. This feature is said to be absent from the Greek cases.
40.30 It is submitted that, although the Court held in Pafitis that the Second Company Law Directive did apply to credit institutions, it also acknowledged the need to protect the interests of savers and more generally the equilibrium of the savings system in order to ensure the stability of the banking system. The argument here is that the Court did not exclude the possibility that those interests might have to be protected by measures that involve the creation of capital otherwise than through the general meeting. It is said that, on the facts of Pafitis the Court did not have to address, and did not address, the question of what should occur if a credit institution of systemic importance to the Union is at risk.
40.31 The respondents lay emphasis on the fact that the Greek cases were decided before the Credit Institutions Winding-Up Directive (“CIWUD”) came into force. The Directive empowers each Member State to decide for itself on the implementation of reorganisation measures in credit institutions, and provides for the recognition of such measures throughout the rest of the Member States. Reorganisation measures are measures intended to preserve or restore the financial situation of a credit institution and which could affect the pre-existing rights of third parties. It is contended by the respondents that the fact that Ireland can decide upon the content of a reorganisation means that it does not have to abide by the principles of the Company Law Directives.
40.32 The respondents rely on the above arguments in respect of the issues relating to the creation of capital, the renominalisation of shares and the pre-emption rights. In addition, they make separate submissions on the latter two issues.
40.33 Article 8 of the Second Company Law Directive, it is contended, does not support the proposition that the members of the company are the only persons authorised to alter nominal value. The point of the Article and, indeed, the equivalent in the Companies Act, 1963 is the protection of creditors, not shareholders. There is nothing in Article 8 to prevent the Oireachtas from amending the Companies Act so as to give responsibility for the setting of the nominal value of shares to a body other than the members in general meeting.
40.34 The respondents rely upon the judgment of the Court of Justice in the case of Pringle v The Government of Ireland (Case C-370/12), which concerned the compatibility with the TFEU of the establishment of the European Stability Mechanism. It is submitted that, in finding the ESM to be lawful, the Court confirmed that support could be provided to a Member State, even outside the provisions of the Treaty, provided that it is done in a way that complies with EU law. Such compliance necessitates that the support be conditional, and fully consistent with the measures of economic policy coordination provided for in the Treaty. The conditionality is said to be fundamental in order to avoid the creation of a disincentive for Member States to conduct a sound budgetary policy, and leading to a breach of Article 125 (the “no bailout” provision). It is submitted that the same considerations apply to assistance under the EFSM.
40.35 The respondents also rely upon the arguments summarised earlier in the judgment in respect of the significance of the Commission approval under the State aid rules.
40.36 Both parties have submitted a number of learned texts on the subject of the Greek cases. Considerations of time and space do not permit a full discussion of them but it can certainly be said that there is support both for the view that this body of jurisprudence prohibits breach of the Second Company Law Directive and for the view that the cases would be decided differently in the light of current circumstances and the existence of CIWUD.
SECTION R
41. Conclusion and findings
41.1 This court finds that it is not in a position to say definitively whether the Court of Justice would resile from, qualify or affirm the jurisprudence outlined above on the Directive. This being a central issue in the case, the determination of which is necessary to the decision of the court, I propose to seek a preliminary ruling from the Court of Justice pursuant to Article 267 of the Treaty.
41.2 For the purpose of this request the court makes the following findings of law and fact:
1. From 2008 onwards, ILP along with other Irish banks became increasingly reliant upon State and EU financial support. As time went by and the financial turmoil of those years did not resolve, the efforts of the Irish government to support the banks did not succeed in convincing the markets of either the banks’ viability or the State’s capacity to continue supporting them.
2. By late 2010 it was apparent that there was a serious threat to the financial stability of the State, in significant part due to the State’s commitments to the banks.
3. The State’s guarantees in respect of ILP amounted to c. €26 billion.
4. In entering into the Programme of Support in November 2010, the Irish State entered into binding legal commitments to the European Commission, the European Central Bank and the International Monetary Fund, including a commitment to recapitalise viable Irish banks.
5. As part of the Programme, the Central Bank of Ireland committed itself to carry out a Prudential Capital Assessment Review and a Prudential Liquidity Review and to determine the capital needs of the banks on the basis of the results.
6. The PCAR and PLAR results were published on the 31st March, 2011.
7. The State was legally committed to ensure recapitalisation in line with the reviews by the 31st July, 2011.
8. The Governor of the Central Bank then directed ILP to raise regulatory capital in the sum of €4 billion. This direction was binding on ILP and was not the subject of any legal challenge. The direction was made by the Central Bank in its capacity of independent regulator.
9. On the balance of probabilities, the required capital could not have been raised from private investors.
10. On the balance of probabilities, the required capital could not have been raised from existing shareholders.
11. On the balance of probabilities, failure to recapitalise by the deadline would have led to a failure of the bank, whether by reason of a run on the bank by depositors, revocation of its licence, a call for repayment of the various Notes, a cessation of funding under the ELA scheme or a combination of some or all of these possibilities.
12. The failure of ILP would, as a matter of probability, have resulted in a complete loss of value to the shareholders.
13. The failure of ILP would, as a matter of probability, have had extreme, adverse consequences for the Irish State, whether by reason of a run on the bank and subsequent calls on the State guarantee of up to c. €26 billion, the contagion effects in relation to the other banks, a full or partial withdrawal of funding to the State under the Programme of Support for non-compliance with its terms, sanctions imposed under the Treaty, or a combination of some or all of these possibilities.
14. The adverse consequences for the State would, as a matter of probability, have worsened the threat to the financial stability of other Member States and of the European Union.
15. The decision by the State to invest in the recapitalisation was made in fulfilment of its legal obligations and in the interests of the State’s financial system, the citizens of the State and the citizens of the European Union.
16. The State decided to recapitalise ILP by way of a subscription by the Minister for Finance for ordinary shares in the sum of €2.3 billion, contingent capital in the sum of €0.4 billion, and a “standby” investment of €1.1 billion. The price to be paid per share was €0.06453, a discount of 10% to the middle market price on the 23rd June, 2011. The calculation of the number of shares required to be issued in return for the €2.3 billion resulted in the acquisition by the Minister of 99.2% of the company.
17. The share price on that date was not the result of a false market. The share price had been falling in any event over the previous number of years, and fell dramatically on publication of the PLAR/PCAR results. As a matter of probability, this was because the market doubted the ability of the bank to achieve the required recapitalisation in a way that would be attractive to investors.
18. Part of the plan for the recapitalisation of the bank involved the sale of its asset Irish Life. This asset belonged to ILP, and not to the shareholders of ILPGH. Its value could not, accordingly, be attributed to those shareholders anymore than the liabilities of ILP could have been attributed to them.
19. To attribute the value of Irish Life to the shareholders would be to make an unlawful return of capital to the shareholders.
20. The paid in share capital of the company was not counted as part of the recapitalisation and has not been taken out of the company by the Minister.
21. The Liability Management Exercise resulted in a significant loss to the subordinated debt holders and contributed significantly to the recapitalisation.
22. The European Commission gave approval under State aid rules for the recapitalisation of ILP by means of the State investment in the same manner, at the same price and to the same extent as that ultimately carried out on foot of the direction order made by the High Court.
23. The Irish Takeover Panel granted a waiver of Rule 9 for the purposes of the State investment on the basis of the same proposal. This did not involve any breach of the Takeover Directive.
24. The Minister’s proposal was supported, albeit reluctantly, by the board of ILP. The board considered that the company had no other option available to it in terms of achieving the required recapitalisation. An EGM was called with a view to passing the necessary resolutions.
25. The State’s proposal was not accepted by the shareholders voting at the EGM on the 20th July, who wished to explore other potential avenues for the raising of the required capital. The Board was instructed to seek an extension of time for the recapitalisation.
26. Neither the Minister for Finance nor the Governor of the Central Bank was minded to seek such an extension. Having regard to the source of the deadline, an extension would have required the consent of the External Partners and the members of the Council.
27. The Minister decided to make a Proposed Direction Order pursuant to the provisions of the Credit Institutions (Stabilisation) Act, 2010.
28. He informed the Governor of the Central Bank of his intentions and complied with the procedural requirements of the Act in so doing.
29. He informed the Board of ILP of his intentions and complied with the procedural requirements of the Act in so doing.
30. The Governor communicated his views, which were supportive of the proposed direction order as being likely to achieve the statutory purposes of the Act.
31. The chairman of the board referred the Minister to the letter he had written after the EGM, outlining the views of the dissenting shareholders.
32. The application for a direction order was made and granted, in accordance with the procedure prescribed by the Act, on the 26th July.
33. There was no want of candour and no breach of duty to the Court on the part of the Minister or his legal representative in the making of the application.
34. One result of the order was (as it would have been under the proposal put to the EGM) that the Minister obtained 99.2% of the issued shares of ILPGH. It was therefore necessary to remove the company’s shares from the official lists in Ireland and the United Kingdom. This did not involve any breach of the MiFID Directive.
35. The Credit Institutions (Stabilisation) Act, 2010 permits the action taken by the Minister. The direction order cannot be set aside or varied unless the Court finds that his opinion that it was necessary was unreasonable or vitiated by legal error.
