## Facts

- The European Commission brought an infringement action against Spain under Article 226 EC (now Article 258 TFEU) concerning Spain’s rules on capital increases and pre-emptive subscription rights for public limited companies.
- The dispute concerned Second Council Directive 77/91/EEC on safeguards for shareholders and creditors, including pre-emptive rights in cash capital increases (Art. 29) and its application to convertible bonds (Art. 42).
- Spain’s legislation allowed a shareholders’ meeting, when excluding or limiting shareholders’ pre-emptive rights in a cash capital increase, to set the issue price of new shares below “fair value,” subject to procedural requirements (management report and independent auditor report) and a floor requiring an issue price higher than net asset value as shown in the auditor’s report.
- Spain granted pre-emptive rights to subscribe new shares not only to shareholders but also to holders of convertible bonds.
- Spain granted pre-emptive rights to subscribe new convertible bonds not only to shareholders but also to holders of earlier issues of convertible bonds.
- Spain did not provide a mechanism permitting the shareholders’ meeting to withdraw pre-emptive rights for issues of bonds convertible into shares.
- Poland, Finland, and the United Kingdom intervened in support of Spain.

## Issues

1. Whether Directive 77/91 (Arts. 42 and 29(1), (4)) bars national rules allowing the issue price of new shares, after withdrawal/restriction of pre-emptive rights, to be set below “fair value” when accompanied by reports and a net-asset-value floor.
2. Whether Directive 77/91 (Art. 29(1), (6)) permits extending shareholders’ pre-emptive rights to subscribe new shares to holders of convertible bonds.
3. Whether Directive 77/91 (Art. 29(1), (6)) permits extending pre-emptive rights to subscribe newly issued convertible bonds to holders of earlier convertible bond issues.
4. Whether Directive 77/91 (Arts. 42 and 29(4)) requires Member States to allow the shareholders’ meeting to withdraw pre-emptive rights for bonds convertible into shares.

## Decision

- The Court dismissed the Commission’s first complaint: Spain did not breach Directive 77/91 by permitting an issue price below “fair value,” where the shareholders’ meeting had both management and auditor reports and the issue price exceeded net asset value shown in the auditor’s report.
- The Court upheld the Commission’s second complaint: Spain breached Article 29(1) and (6) by granting pre-emptive rights to subscribe new shares to convertible bondholders in addition to shareholders.
- The Court upheld the Commission’s third complaint: Spain breached Article 29(1) and (6) by granting pre-emptive rights to subscribe new convertible bonds to holders of earlier convertible bond issues in addition to shareholders.
- The Court upheld the Commission’s fourth complaint: Spain breached Articles 42 and 29(4) by failing to provide that the shareholders’ meeting may withdraw pre-emptive subscription rights for bonds convertible into shares.
- Costs were allocated based on partial success: Spain paid costs in proportion to the parts on which it lost; interveners bore their own costs.

## Legal Principles

- Directive 77/91 sets minimum shareholder- and creditor-protection requirements; Member States may adopt more protective conditions, but may not alter the Directive’s basic allocation of pre-emptive rights.
- Shareholders’ pre-emptive rights in cash capital increases are the default rule; restrictions are permitted only through the mechanism and conditions specified in Article 29(4).
- National rules allowing withdrawal or restriction of pre-emptive rights may be compatible with the Directive where procedural safeguards ensure informed decision-making and preserve a minimum value floor (e.g., auditor-based net asset value).
- Articles 29 and 42 structure pre-emptive rights around shareholders; Member States may not extend those rights in a manner that subordinates or competes with shareholders’ priority by granting parallel rights to convertible bondholders.
- Because Article 42 applies Article 29 to convertible bonds, the option for the shareholders’ meeting to withdraw pre-emptive rights under Article 29(4) must also exist for issues of bonds convertible into shares.

## Conclusion

The Court held that Spain complied with Directive 77/91 on share pricing safeguards when pre-emptive rights are withdrawn, but violated the Directive by extending pre-emptive rights to convertible bondholders and by failing to provide a shareholder-meeting mechanism to withdraw pre-emptive rights for convertible bond issues.


Comm’n of the Eur. Cmtys. v. Spain (Comm’n), Case C-338/06 (ECJ Dec. 18, 2008)