C-373/97

DIAMANTIS

OPINION OF ADVOCATE GENERAL SAGGIO delivered on 28 October 1999 *

1. By order of 24 June 1997 the Polimeles point that the dispute arose from a delay on Protodikio (Court of First Instance) Athi- the part of that Member State in fully non has referred to the Court for a implementing the Directive. The Court has preliminary ruling two questions on the already, a number of times, had occasion to interpretation of Article 25 of the Second examine that dispute, 2and has stated quite Council Directive 77/91/EEC of 13 Decem- clearly, as regards national legislative pro- ber 1976 on coordination of safeguards visions incompatible with the Directive, which, for the protection of the interests of that the objective of the provision of members and others, are required by Community law cited above 'is to ensure, Member States of companies within the for the benefit of shareholders, that a meaning of the second paragraph of Arti- decision increasing the capital of the com- cle 58 of the Treaty, in respect of the pany and, consequently, affecting the share formation of public limited liability com- of equity held by them, is not taken without panies and the maintenance and alteration their participation in the exercise of the of their capital, with a view to making such decision-making powers of the company'. 3 safeguards equivalent (hereinafter 'the Directive'), 1and on the abuse of a right arising from a Community provision. The national court asks specifically whether, given the circumstances in the main action, the provision of national law which pena- lises the abuse of a right can validly be Community law relied on in relation to an action for annulment of company measures brought by a shareholder for breach of a right conferred by the Directive. 3. The Directive is intended to coordinate, with a view to rendering them equivalent, the safeguards required by Member States of companies within the meaning of Arti- cle 58(2) of the EC Treaty (now Arti-

Under Article 25(1) of the Directive, '[A]ny increase in capital must be decided upon by the general meeting. Both this decision and 4. Finally, Article 41(1) grants Member the increase in the subscribed capital shall States the option of derogating from Arti- be published in the manner laid down by cle 25 of the Directive, to the extent that the laws of each Member State, in accor- this is necessary for the adoption or appli- dance with Article 3 of Directive 68/151/ cation of provisions designed to encourage EEC'. Article 25(2) states; '[N]evertheless, the participation of employees, or other the statutes or instrument of incorporation groups of persons defined by national law, or the general meeting, the decision of in the capital of undertakings. which must be published in accordance with the rules referred to in paragraph 1, may authorise 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. 5. The Directive allows Member States two Where appropriate, the increase in the years to bring it into force. In the case of subscribed capital shall be decided on the Hellenic Republic, the period in ques- within the limits of the amount fixed, by tion, by virtue of the Act of Accession, the company body empowered to do so. expired on 1 January 1981. 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'.

National legislation

in Greece, a public limited company with Article 8(1), as amended by Law capital entirely underwritten by the State, No 1472/1984, 5provides that on publica- the object of which is to contribute to the tion of the ministerial decision making an financial and social development of the undertaking subject to the provisions of country through financial reorganisation of that Law, the powers of the undertaking's companies, the import and application of administrative organs are to cease and that, foreign technologies, the development of while the general meeting is retained, it is national technological patrimony and the no longer empowered to dismiss the mem- establishment and management of nationa- bers of the board of administration lised or mixed economy undertakings (Arti- appointed by the OAE. Under Article 8(8), cle 2(2) of the Law). the OAE may decide, in the course of its provisional administration of the under- taking subject to the above scheme, to increase the capital of the company con- cerned by way of derogation from the legislation in force relating to public limited liability companies, which provides that the general meeting of shareholders is to have exclusive competence. The increase must be To that end, the OAE may take over the approved by the competent Minister. The administration and day-to-day manage- Law provides that the former shareholders ment of undertakings undergoing reorgani- nevertheless retain their right of pre-emp- sation or nationalised undertakings, take tion on the acquisition of new share issues shares in the capital of undertakings, grant, and may exercise it within a period pre- issue or take out certain loans, acquire scribed in the ministerial decision approv- bonds and transfer shares, in particular to ing the increase. workers or to organisations representing them, to local authorities or to other legal persons constituted under public law, chari- table institutions, social organisations or individuals (Article 2(3) of the Law).

proceedings under Article 169 of the EC No 1386/1983. The request was repeated Treaty (now Article 226 EC) for a declara- on 20 December 1983. tion that the Hellenic Republic had failed to fulfil its obligations under the Second Directive. On 10 March 1990 the Greek Parliament adopted Law No 1882/1990, 7 by which it amended the previous legisla- tion on the disputed points and as requested by the Commission. Only from that date, therefore, did Greece fulfil the 11. Following the request by the company, requirement of transposing the Directive the Advisory Committee established pur- into national law. suant to Article 11 of the Law was con- sulted. Given the precarious financial con- ditions of the company, the committee proposed making the company subject to the special liquidation scheme provided for in Articles 7(3) and 9 of the Law, which 9. Lastly, Article 281 of the Greek Civil would have meant the immediate liquida- Code provides that 'the exercise of a right is tion of the assets and payment of its debts. prohibited where it manifestly exceeds the The opinion of the committee was, how- bounds of good faith, morality or the social ever, not followed by the Minister who, by or economic purpose of that right'. Decision No 212 of 3 February 1984, 8 decided to place the company under a different scheme, also provided for in Article 7(1) of the Law, the scheme for provisional OAE administration.

Facts of the case and the questions referred for preliminary ruling

14. The defendants, the Greek Government and the OAE, replied that, under Arti- cle 281 of the Greek Civil Code, Mr By Decision No 14 of 9 January 1987 of Diamantis had abused the right conferred the Second Minister for Industry, Energy on him by Article 25(1) of the Directive and Technology, the capital was once again and asked that the action be dismissed. The increased, in accordance with Article 10 of facts which were considered by the defen- Law No 1386/1983, up to a sum of GRD 1 dants to constitute abuse of a right were as 267 200 000, divided into 1 267 200 follows: (a) Mr Diamantis himself, together shares. From that time the company with other shareholders, asked for the resumed normal operations. By the same company to be made subject to the scheme Ministerial Decision, the provisional under Law No 1386/1983; (b) because of administration under the OAE came to an the financial difficulties of the company, end. In 1991 the majority of shares in the Mr Diamantis had never been in favour of company were transferred to the company increasing its capital, and in fact had never Plastika MaKedonias AE and in February exercised the right of pre-emption granted 1994 Plastika Kavalas was taken over by to him at the time of the first increase; (c) it the Petzetakis Group. was only following the reorganisation of the company, from which Mr Diamantis had clearly benefited, but which had sub- stantial and irreversible consequences on the distribution of capital and shares, that he had decided to exercise his rights; in fact, the action was only brought five years after the first increase in capital and four The legal proceedings years after the second.

shown, on the one hand, that the plaintiff 2. Should the Court find the above plea in the main proceedings participated in the well founded in law and in substance, request that the company be made subject how will that affect the validity of the to the scheme provided by the Law and, on ministerial decisions increasing and the other, that because of the financial reducing the capital of the company difficulties of the company, he had never in question, of which the plaintiff wanted to increase the capital, which was happens to be a shareholder, and, by why he had never exercised his right of pre- extension, are Articles 8(8) and 10(1) emption under the national legislation. On of Law No 1386/1983 compatible with that basis, the national court held that, Council Directive 77/91/EEC?' taking account of the period of time which had elapsed since the operations increasing and temporarily reducing the capital, the exercise of this right by Mr Diamantis and the possible calling in question of legal situations already established would go beyond the limits imposed by good faith, morality and the social and economic 16. On 20 November 1997 the Court deci- purpose of the law itself. ded to stay proceedings until the judgment in Kefalas, cited above. Once that judgment had been delivered, it was communicated to the national court so it could consider whether or not to persist with the questions for preliminary ruling. The Greek court replied to the Court of Justice that it did not have authorisation to reconsider its As the national court considers, however, decision of its own motion and that, in any that it would be useful for the Court of case, in its opinion, the circumstances of Justice to rule on the application in this Kefalas were not identical to those in case of the principle of abuse of a right — Diamantis. regarded, in the light of the Court's pre- vious case-law, as 'a general principle under the national law of the Member States' — it has referred the following questions to the Court for a preliminary ruling:

in its previous judgments, cited above, on the capital or of imposing on them the the interpretation of Article 25 of the addition of new shareholders, thus redu- Second Directive and on the compatibility cing their involvement in the decision- of the Greek legislation on the reorganisa- taking power of the company'. 1 0In other tion of undertakings in difficulties — the words, the Court made it clear that, even subject of these proceedings — with the under special rules which have as their provisions of the Directive. object the reorganisation of the company, the general meeting of shareholders could

general meeting of shareholders had the power to decide on increases in capital. Having established that that provision has 19. In Pafitis, cited above, the Court, direct effect, 9 the Court affirmed that although no specific question was put on Article 25 precluded national legislation the subject, considered for the first time the which, with the object of ensuring the possible application of the national rule on reorganisation of companies in difficulties, abuse of rights to court proceedings provides that their capital may be increased brought by shareholders of companies by means of an administrative act, even if subject to Greek law.

Given the tional — under which it is possible to facts of the case, the Court rejected the decide by administrative measure, outside arguments advanced by the Greek Govern- any decision by the general meeting of ment, concluding that 'the uniform appli- shareholders, to effect an increase in the cation and full effect of Community law company's capital which would have the would be undermined if a shareholder effect either of obliging the original share- relying on Article 25(1) of the Second holders to increase their contributions to

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Directive were deemed to be abusing his of a right arising from a provision of rights merely because he was a minority Community law is abusive cannot be shareholder of a company subject to reor- regarded as contrary to the Community ganisation measures or had benefited from legal order'. 12 The Court went on to state, the reorganisation of the company. Since as in Pafitis, that 'the application of [...] a Article 25(1) applies without distinction to national rule must not prejudice the full all shareholders, regardless of the outcome effect and uniform application of Commu- of any reorganisation procedure, to treat an nity law in the Member States'. Conse- action based on Article 25(1) as abusive for quently, 'it is not open to national courts, such reasons would be tantamount to when assessing the exercise of a right altering the scope of that provision'. arising from a provision of Community law, to alter the scope of that provision or to compromise the objectives pursued by it'. 13

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DIAMANTIS

condition of his being able to rely on that 23. It seems clear then that although, on provision, to participate in an increase in the one hand, the Court indicated that the capital adopted without the approval of the rule applicable for the purpose of assessing general meeting would be to alter the scope the abusive conduct was the national rule, of Article 25(1)'. 15 on the other hand, it laid down precise . criteria which, in the final analysis, refer to the primacy of Community law over national law and which keep within well defined limits the application of a national rule which, far from being classifiable as 'procedural', entails an appraisal relating to the substantive scope of the provision of 22. It is clear from Kefalas that the Court Community law designed to grant particu- has accepted that the national court may lar rights. The point is that the Court apply a rule of national law in order to expressly prohibits national courts from decide whether there has been abusive applying a national rule on abuse of a right exercise of a right conferred by Community in all cases in which such application would law, provided always however that entail a modification of the scope of the recourse to the national rule does not Community provision or would compro- compromise the full effect and uniform mise its objectives. application of Community law, and in particular does not entail an amendment of the Community provision nor compro- mise the objectives pursued by it.

penalising abuse of the right is tantamount 26. Now that the significance which, in my to penalising recourse to Community law opinion, must be attached to the reference, where those limits have been exceeded, that as formulated by the Court, to the national is to say precisely in those situations where rule on abuse of a right has be clarified, and Community law was not intended to be moving on, therefore, to the specific cir- applied. cumstances in point in the main proceed- ings, I would observe at once that the considerations put forward by the Court in Kefalas are of assistance in resolving the questions which concern us here, since the circumstances taken into account in Kefalas are in part identical to those before this

The Court has increase the capital of the company — have repeatedly stated that the decision-making brought an action for annulment of the power of the general meeting subsists even increase in capital with the sole aim of where the company is experiencing serious obtaining, to the detriment of the company, financial difficulties. 19 Since it is clear, unlawful advantages clearly alien to the moreover, that an increase in capital, by objective of Article 25(1) of the Directive, definition, is intended to improve the that court will be able to have recourse to company's financial situation, to consider the national rule on abuse of a right in abusive, for that reason, an action based on order to dismiss the action.

27. There remains, therefore, one further fact to be considered which, according to the national court, makes it possible to characterise as 'abusive' the action brought by the plaintiff. It is the fact that the plaintiff, together with 32 other share- holders who constituted the majority of the company's shareholders, had himself 29. I do not consider that it is necessary to asked for the company to be placed under attribute to the behaviour of the share- the special scheme established by Law holder the significance which the national No 1386/1983. Since a number of years court, together with the Greek Govern- had passed since the increase in capital at ment, seek to attribute to it. To request the issue, the exercise of that right on the part application of the Law does not necessarily of the shareholder and the challenge to signify, for the shareholder, accepting that established (and, I assume, irrevocable) decisions on the increase of capital should legal situations constitutes, according to be transferred to a body external to the the national court, a failure to observe the general meeting. The subjection of the limits imposed by good faith, morality and company to the scheme provided for by the social and economic purpose of the the Law in fact opens up a wide range of right in question. solutions with respect to the fate of the company, and it would therefore be going too far to attribute particular significance to the behaviour of the shareholder, all the more so since, as the national court states, the plaintiff in the main proceedings never 28. Let me say at once that I am not in wished for an increase in the capital, which agreement with this conclusion. To accept was why he did not exercise his right to this point of view of the Greek court pre-emption, to which, however, he was would, in fact, mean interpreting Arti- entitled. It may thus be assumed that in cle 25(1) of the Directive in such a way as taking part in the request for the company to exclude from its scope shareholders who, to be made subject to the special law, the as it were, had demonstrated their acquies- shareholder was in fact seeking a result cence in the breach of their right to decide other than the liquidation of the company, what was to happen to the capital of the with the benefits granted from that Law. company, entrusting the management of This appears entirely plausible given that the company to a body other than the the financial situation of the company at general meeting. In other words, this would the time of the request was so fragile as to mean penalising, by means of the general suggest to the Advisory Committee estab- principle of abuse of a right, contradictory lished under the Law that they should

proceed to liquidation, with the advan- the right since he exercised it some years tages, in terms of repayment of debts, set after the operations in question, whereas out in Articles 7 and 9 of the Law. initially, by requesting the operations of the scheme provided by the Special Law, he had tacitly and a priori acquiesced in the breach of his rights. This, so the argument runs, demonstrates that the real objective of the shareholder in bringing the action before the national court, was to obtain unlawful advantages, never specified, let it 30. In the result, although it is true that by be said, either by the defendants in the requesting that the company be placed main proceedings or by the national court, under the scheme provided by the Law to the detriment of the company. the shareholders could not automatically rule out that, if the request were upheld, the consequence would be an external body being granted powers to decide alterations in the capital of the company, I consider that the link between the wishes of the shareholders and the decisions of the administrative organs is too vague and 32. Such an argument cannot be accepted. indirect for it to be possible to maintain As support for this point of view, it is that, by bringing an action for annulment sufficient to take due account of the fact of the decisions taken in breach of the that the right which it is claimed the Directive, the shareholders were attempting shareholder exercised 'too late' is a legal to obtain, to the detriment of the company, position conferred by a Community direc- unlawful advantages clearly alien to the tive which was not implemented within the purpose of the provision. prescribed period by the Hellenic Republic. The directive alleged to have been infringed should have been implemented in Greece by the date indicated in the Act of Acces- sion (1 January 1981). As we know, this did not happen; indeed, two years after that date, Greece adopted a national law pro- viding for a scheme for increasing the 31. But that is not all. I would recall that capital of companies which runs counter the main argument — which, in fact, in the to Article 25 of the Directive. light of Refalas, becomes the sole argu- ment — which the defendants in the main proceedings are putting forward to char- acterise as 'abusive' the exercise of a right on the part of the shareholder is linked to the delay in his bringing the action to obtain a declaration that the resolutions of the general meeting made in breach of the 33. In these circumstances, where there is a Directive were invalid. In other words, they clear, continuing failure to fulfil Commu- claim, the shareholder exceeded the limits nity obligations on the part of that Member imposed by good faith, morality and the State, I do not consider that any negative social and economic purpose in relation to conclusions may be drawn as against an

34. I would point out, next, that Arti- cle 189 of the EC Treaty (now Article 249 35. That being so, I think it would be EC), in conjunction with the general prin- wrong to claim that it was the individual's ciple of good faith referred to in Article 5 duty to be aware of his right, failing which of the EC Treaty (now Article 10 EC) and the exercise of that right, based on the with the general clause inserted in the text Directive, which had not been implemen- of directives, 21 requires the Member States ted, would be qualified as 'abusive' in all to adopt the laws, regulations and admin- circumstances where his behaviour was in some way or other inconsistent with the provisions of the Directive. To adopt any 20 — It may be added that it appears the action was brought by other view would allow the State, respon- the shareholder within the prescribed limitation period. sible for the infringement, and therefore 21 — Article 4 3 of the Directive requires Member States to bring it into force within two years of its notification. As directly responsible for the difficulties mentioned above, in Greece's case, in accordance with Article 143 of the Act of Accession, the time-limit was encountered by the individual in being 1 January 1981. informed of his right, to gain advantage

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legitimate. To classify as abusive the fact of bringing an action based on the Directive for the sole reason that, before the action taken by the Member State to implement it and therefore while the State was in breach of its obligations, the individual engaged in conduct wholly legitimate with respect to 36. The circumstances which gave rise to national law but not compatible with the this dispute confirm the conclusions I have Directive, would be tantamount to requir- reached. It is apparent from the order for ing the individual to be aware of the rights reference and the observations submitted conferred by a Community directive, since by the parties that the plaintiff in the main failure to exercise those rights or behaviour proceedings brought the action in February incompatible with the Directive would 1991, some years after the adoption of the result in negative consequences for him. measures at issue (but having complied This would amount, therefore, to weaken- with the relevant limitation period) and ing, first, the principle according to which immediately after the Advocate General's the 'vertical' direct effect of directives is a Opinion in Karelia and Karellas was deliv- means made available to individuals to ered in this Court.22The plaintiff's counsel enable them to react against breaches of stated at the hearing before the Court that Community law by a Member State, and, it was only on reading that Opinion, which second, the deterrent effect of such means was followed by the Court, that it was in respect of breaches of the obligation to possible to obtain some clarity in Greece as implement Directives properly, and within to the legal position of shareholders, the the prescribed period.

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national law, to the requirement for the full were open to the national court to char- and uniform implementation of directives acterise as abusive the exercise of a right by in the Member States and, in the final a shareholder by reason of the fact that he analysis, to the application of the general did not exercise his right to pre-emption in principle of good faith referred to in respect of shares issued following an Article 5 of the EC Treaty, it cannot be increase in capital effected in a manner considered that, as Community law stands incompatible with Article 25 of the Direc- at present, there is a presumption of tive, or because he requested that the knowledge of the rights conferred by a company concerned be made subject to directive which has not been implemented. the application of a national law incompa- Consequently, apparently inconsistent tible with the Directive at a time when, in behaviour on the part of an individual — consequence of the infringement by the such as that in point in this case — cannot Member State invoking abuse of the right, in any event be penalised by the application the shareholder could legitimately have of the general principle which prohibits been unaware of the right conferred on abuse of a right. 23 him by the Directive, which had not been implemented.

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Conclusion

39. In the light of the foregoing considerations, I suggest that the Court answer the questions put by the Polymeles Protodikio Athinon as follows:

Article 25 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 must be interpreted as meaning that a national court may not characterise as abusive the conduct of a shareholder who requests that an increase in capital which took place in a manner prohibited by the Directive be declared unlawful on the ground that he did not exercise his right of pre-emption in respect of the shares issued following the increase in capital, or on the ground that his company is subject to the national law incompatible with the Directive at a time when, in consequence of the failure on the part of the Member State claiming the exercise of that right to be abusive to fulfil its obligations, the shareholder might not have been unaware of the right conferred on him by the Directive, which had not been implemented.

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