Financing S.A. through Hybrid Securities (Part I)

Legal Insight

February 2025

Anta Tsogia, LL.M. (mult.)

Summary: The modern financing of public limited companies (S.A.) is shaped by market developments and technological advancements, leading to the emergence of hybrid financing securities. Traditional forms of capital reinforcement are being restructured to offer greater flexibility and adaptability. The goal is to create financial instruments that meet both the needs of issuing companies and the expectations of investors, optimizing capital structure and attracting investment. The key criterion for obtaining the necessary financing is the valuation of securities by potential investors. This article provides an overview of common hybrid securities that have gained traction in the investment landscape, some of which have already been legislatively regulated.

1. Introduction

The need for companies to find the ideal financial structure, combined with global financial developments, has led to a gradual relaxation of the principle of numerus clausus concerning the types of securities that an S.A. can issue (e.g., shares, bonds, warrants, and founders' shares). In practice, this is achieved through the creation of modern financial instruments, either by combining different types of securities that can only be acquired and transferred together (stapled securities) or by fragmenting the rights provided by existing securities (stripped securities). These innovations provide flexible financing solutions tailored to corporate needs while raising legal certainty concerns. For investors, the ability to invest in financial instruments aligned with their knowledge, risk tolerance, and investment goals serves as a significant incentive.

2. Stapled Securities

The concept of stapling refers to linking multiple types or categories of securities issued by an S.A. (e.g., shares and bonds) into a single unit, preventing their separate transfer (Art. 33(3) Law 4548/2018). This method creates complex financial products that enhance capital-raising flexibility. Combining different securities can make investments more attractive by offering diversification and potentially higher returns. However, this requirement for joint disposal may reduce marketability. Notably, legal provisions allow for the seizure of only one type of stapled security, despite their combination.

3. Stripped Securities

Stripping involves separating the economic rights of a share or other security into distinct components that can be traded independently. According to Art. 33(5) of Law 4548/2018, cash flow elements such as dividends, interest, and redemption rights, as well as specific entitlements (e.g., preemptive rights, liquidation proceeds, or option rights), can be freely transferred. However, voting and governance rights remain with the shareholder. This flexibility enhances liquidity and enables investors solely interested in financial gains to avoid involvement in corporate decision-making.

4. Hybrid Shares

a. Preferred Shares

Preferred shares grant holders specific privileges defined in the company’s articles of association (Art. 38, Law 4548/2018), often restricting or eliminating voting rights. These shares attract investors seeking stable returns without corporate governance involvement. They can also be issued as convertible preferred shares, which may be converted into common or other classes of preferred shares under predefined conditions. Common types of preferred shares include:

Preferred shares with interest rights: Unlike common shares, which generate income through dividends, these provide a fixed interest return. However, payment is subject to financial constraints (Art. 159, Law 4548/2018), ensuring that distribution does not jeopardize the company’s financial health. Accrued unpaid interest may be carried forward in cumulative interest structures.

Preferred shares with fixed dividends: These guarantee a fixed income regardless of the company's profitability, subject to available distributable profits. Accumulated unpaid dividends can be carried forward for future payment.

Tracking shares: These shares entitle holders to profits from a specific business sector of the company, rather than overall corporate earnings. This structure allows investors to focus on profitable segments without exposure to broader corporate risks.

b. Redeemable Shares

Redeemable shares (Art. 39, Law 4548/2018) allow either the company or the shareholder to demand redemption under predefined conditions. These shares combine equity and debt characteristics, offering strategic flexibility. Redemption can be financed through distributable profits, new share issuance, or capital reduction. The process may be initiated by the company (callable shares) or by shareholders (puttable shares), with the latter requiring sufficient funds for execution. Redeemed shares are treated as treasury shares and do not immediately reduce share capital but impact net equity. Transparency and shareholder protection regulations govern redemption transactions.

5. Conclusion

The use of hybrid securities in S.A. financing represents an innovative and flexible approach, blending equity issuance benefits with debt financing mechanisms. While the relaxation of numerus clausus raises interpretative challenges, it enables companies to access modern financial tools aligned with evolving market needs. Hybrid instruments allow companies to design flexible financial strategies, while investors gain access to securities that match their risk profiles and investment objectives.