Mergers and Acquisitions: Exceptions of exercise of pre-emptive rights by the banks and banking institutions in Armenia
Mergers and acqusitions in the banking industry has been buoyant for the past couple of years in Armenia. This activity has been fuelled by the regulatory requirements for increase of the charter capital of the banks due to the desire of the regulator, the Central Bank of Armenia, to see larger and predictable players in the market easy to supervise. This has been coupled with the increasing interests of international players and investors towards the robust banking sector or Armenia which has offered stable exchange rates and much higher interest on debt and equity compared to that of developed markets such as Western Europe, North America and Middle East.
In this context Legelata has consitently faced the same issues with regard to interpretation of the provisions in banking and company law related legislation which are crucial in the context of transfer and acquisition of shares in banks and banking institutions. One of those issues seem to be the right of refusal of the bank with respect to its own share under transfer.
Most of the banks in Armenia are formed as joint stock companies (either closed joint stock companies or open joint stock companies). One of the crucial differences between the open and closed joint stock companies in accordance with companies law is that the transfer of the shares to third parties in open joint stock companies, as opposed to closed joint stock companies, takes place without regard to any pre-emptive or first refusal rights with respect to shares under transfer.
In general the legislation on joint stock companies provides that the existing shareholders of the company have the right of first refusal in case of transfer of the shares by one of the shareholders to a third party. The company has the second right of first refusal to acquire the shares if the existing shareholders have not exercised the rights of first refusal with respect to the shares under transfer.
The law on joint stock companies (Article 8) provides that the closed joint stock company has the right of first refusal after the existing shareholders to purchase its own shares, whereas the law on banks and banking activity (Article 37.1) provides that the banks are prohibited from purchasing its own shares (except for redemption – Article 36).
While many would try to find a collision in these provisions, the issue is plainly straightforward. Article 1.4 of the law on Joint Stock Companies, as long as the banks are concerned, gives priority to the laws which are of more specific nature with regard to banks and finance institutions. Moreover, the law on Legal Acts of Armenia (article 40) reiterates that in case of collision of norms of general and specific nature, the norms of specific nature (in our case the provisions in the law on Banks and Banking Activity) prevail.
Last but not least, the general analaysis of the laws in question reveals that the same principle of differentiation applies in different contexts with regard to the issuance, allotment and redemption of shares.
Hence, whenever it comes to decision of application of the law on Banks and Banking Activity and the law on Joint Stock Company, the first prevails as lex specialis over the second as lex generalis. There should be no doubt therefore, that the banks are prohibited from exercise of the right of first refusal when the shares of the latter are transferred by the shareholders.