After a six-year legislative process, the Austrian Parliament has enacted the Substitution of Equity Act (Eigenkapitalersatz-Gesetz (EKEG)), which will come into force on January 1 2004. The Act deals with the concept of a shareholder loan that replaces equity and is treated as equity (Eigenkapitalersatz) when a company is in financial crisis - a peculiarity of German and Austrian corporate law. In the absence of explicit statutory provisions, the Austrian Supreme Court (Oberster Gerichtshof (OGH)) has so far applied a modified approach of German law principles to shareholder loans substituting equity (eigenkapitalersetzende Gesellschafterdarlehen).
The core provisions of the EKEG are:
Shareholders' credit in times of crisis
A shareholder loan granted to an Austrian company in a time of the company's financial crisis is (with the exception of certain bridge loans as identified in the EKEG) generally deemed to constitute a credit substituting equity (eigenkapitalersetzender Kredit). A company is in a financial crisis if the company is insolvent or over-indebted. The EKEG presumes there is a crisis if the criteria for the initiation of reorganization proceedings (Reorganisationsverfahren) set out in the Business Reorganisation Act (Unternehmensreorganisations-Gesetz (URG)) are met.
Granting of loans
Granting of loans is a broad term and includes any type of contribution for which consideration is credited (for example, a purchase of land where the purchase price is credited), provided that the contribution does not qualify as bridge loan. Thus, the EKEG does not apply to cash loans with a maturity of up to 60 days, commercial credits not exceeding a six-month period (or longer if customary) or credit extensions and deferments of repayment (if relating to credits granted before the crisis).
Companies and shareholders affected
The EKEG lists among the companies affected, corporations, cooperatives with limited liability and partnerships with no physical person as general partner. Because the EKEG will generally apply only to shareholders (Gesellschafter), the EKEG regulates who is to be considered as shareholder in great detail. The criteria for qualifying as a shareholder are (i) a controlling stake in a company as defined in the EKEG (for example, the right to nominate the majority of managing directors or supervisory board members), (ii) a 25% shareholding in the nominal capital of the corporation (or, in the case of partnerships, a 25% share in the partnership's assets) or (iii) dominant influence. Non-shareholders may also be caught by the EKEG under specific circumstances (for example, trusteeships, affiliated companies or group of companies). The EKEG may also apply to credit institutions with no shareholding in the borrower, if the credit institution exercises a dominant factual influence on its borrower.
Exemptions and privileged contributions
Nevertheless, certain categories of shareholdings including holdings in investment funds, equity funds, pension funds, small and medium-sized enterprise financing or company pension plans (each as defined in detail in the EKEG) do not fall within the scope of the EKEG. To allow corporate reorganizations, the Act allows the acquisition of a stake in a struggling company for the purpose of overcoming that company's financial crisis coupled with a grant of credit in the (timely) context of a feasible reorganization (Sanierungsprivileg).
Stay of redemption (Rückzahlungssperre)
If a shareholder has lent to a company in crisis, the EKEG provides for a stay of redemption (Rückzahlungssperre) as long as the company is in a financial crisis. Should the shareholder have been repaid or satisfied by other means, they are obliged to reimburse the company accordingly. Also a security (in whatever form) provided by a shareholder to a third party in consideration of a third party's credit is deemed to substitute equity if the criteria outlined above are met. Consequently, if the third party realizes the security, that shareholder does not have a recourse claim against the company as long as the company is in financial crisis. Should the third party opt to proceed against the company instead, the company may request indemnification from the shareholder having granted the security.
Insolvency and subordination
Concurrently with the entry into force of the EKEG, Austria is also amending the Austrian Insolvency Act (Konkursordnung (KO)). The amendment explicitly provides that shareholder contributions substituting equity will be subordinated to other creditors' claims in a company's insolvency.
Martin Ebner and Ursula Rath