On Tuesday 8 November, the European Court of Justice ruled that an increase in the share capital of a bank is lawful without the agreement of the shareholders’ general meeting in a situation where there is a serious disturbance of the economy and a member state’s financial system.
The interests of shareholders and creditors cannot be held to prevail in all circumstances over the general interest of the stability of the financial system. This is the key message of this ruling in Case C-41/15, in which it was necessary to carry out a tricky weighting of interests at play at the start of the big crisis that hit Europe in 2008. While the case in question is about an Irish bank, the Court did not only take Ireland’s interests into account, but also those of the other EU member states.
In July 2011, the Irish finance minister obtained an injunction requiring an Irish bank, ILP, to issue new shares to the state in return for aid of €2.7 billion, which led to 99.2% of the company’s shares being bought despite opposition from the bank’s shareholders. This was needed to enable the EU to agree to grant Ireland financial aid after its banking sector was hard hit by the 2008 crisis.
A simple question was asked – does EU law preclude an increase in the share capital of a bank without the agreement of the general meeting of the shareholders in a situation where there is a serious disturbance of the economy and the financial system of a member state? The answer from the bank’s associates and shareholders was clearly ‘no’, if one were to respect a directive from the 1970s coordinating the guarantees that limited companies must give to protect the interest of third parties and associates (77/91/EEC).
The Court did not view matters like this, focusing instead on the circumstances that led to the passing of the injunction, which proved decisive. The circumstances were judged "exceptional" and such that the 1977 directive did not apply because it was designed for "ordinary" circumstances, explains the Court. Moreover, an appropriate weighting of interests was carried out in this case because it was clear that this "was the only means of ensuring, by 31 July 2011, the recapitalisation of ILP that was necessary to prevent the failure of that financial institution and thereby to forestall a serious threat to the financial stability of the EU". (Original version in French by Jan Kordys)